Dollar, Bonds, or Gold: Which Safe Haven Performs Best During Market Turmoil?
Rising tensions in the Middle East have once again pushed investors to search for safe-haven assets, reviving the debate over which investments truly offer protection during periods of geopolitical stress.
The answer is not straightforward. Traditional safe havens have shown mixed behavior. Gold prices have been volatile, while the U.S. dollar, which had fallen out of favor over the past year, has recently strengthened again.
Below is a closer look at how the most common safe-haven assets are performing.
U.S. Dollar Shows Strength During Market Uncertainty
Among the traditional safe havens, the U.S. dollar has arguably performed the strongest this week.
The U.S. Dollar Index, which measures the dollar against six major currencies, has risen about 1.5%. The greenback has also gained against both the Swiss franc and the Japanese yen, two currencies that usually strengthen during times of financial stress.
This rebound is notable because the dollar weakened earlier this year during the tariff-related market turmoil in April, raising doubts about its safe-haven reputation.
Market data indicates that short-term dollar liquidity, rather than long-term dollar assets, is currently attracting investor demand.
Another factor supporting the dollar is the United States’ role as a net energy exporter. Geopolitical tensions that push Brent crude oil above $80 per barrel can often benefit the U.S. currency.
However, Morgan Stanley’s head of FX strategy, James Lord, notes that the dollar’s safe-haven appeal can vary depending on the situation. According to him, uncertainty around U.S. economic policy has weakened the currency’s traditional defensive qualities in recent years.
Government Bonds Fail to Attract Safe-Haven Demand
Unlike in previous crises, government bonds have not attracted strong safe-haven inflows during the current geopolitical tensions.
Instead, investors are focusing more on inflation expectations and fiscal policy rather than the defensive qualities of sovereign debt.
Concerns about increasing government borrowing are also weighing on bond markets. For example, Germany’s decision to relax its debt brake rules has raised questions about future fiscal discipline.
As a result, Germany’s 10-year Bund yields — the benchmark for the eurozone — have increased by 14 basis points this week, indicating falling bond prices.
Bryn Jones, head of fixed income at Rathbones, said that although Germany is generally seen as a high-quality investment, the outlook becomes less attractive when governments are issuing more debt.
Gold Maintains Its Long-Term Safe-Haven Reputation
Despite recent volatility, gold continues to hold strong safe-haven credibility. The precious metal has surged roughly 240% since the start of the decade, reflecting strong investor demand during periods of economic uncertainty.
Gold prices did experience a sharp drop earlier this week. Analysts believe the decline was partly caused by investors selling profitable assets to cover losses elsewhere as markets reacted to the Middle East conflict.
However, experts emphasize that this short-term volatility does not undermine gold’s long-term safe-haven status. Ongoing concerns about inflation, geopolitical risks, and rising global debt levels continue to support the metal.
According to State Street Investment Management, gold remains significantly under-represented in global investment portfolios. Allocations to gold exchange-traded funds (ETFs) account for less than 1% of global fund assets, far below the 5% to 10% strategic allocation range suggested by the firm.
State Street’s head of gold strategy, Aakash Doshi, believes the outlook for gold prices remains strong, noting that $6,000 per ounce may be more likely than $4,000 this year, with prices currently trading slightly above $5,000.
Traditional Currency Havens Face New Challenges
Two other well-known safe-haven currencies — the Swiss franc and the Japanese yen — have both weakened recently.
So far this week, the franc has fallen about 1.2%, while the yen has dropped roughly 0.8%.
Despite this decline, Justin Onuekwusi, chief investment officer at St. James’s Place, says the Japanese yen still appears attractive from a valuation perspective and could offer protection in the current market environment.
However, political uncertainty in Japan may complicate the outlook. Reports suggest that Japanese Prime Minister Sanae Takaichi has expressed concerns about further interest rate increases, which could affect the currency.
Meanwhile, the Swiss franc’s upside potential may be limited because the Swiss National Bank (SNB) has warned it may intervene in markets to prevent excessive currency strength.
Goldman Sachs strategist Teresa Alves said that the risk of SNB intervention could reduce the franc’s traditional safe-haven appeal during the current crisis.
Defensive Stocks Provide Limited Protection
Equities typically struggle during periods of geopolitical stress, although defensive sectors such as utilities and consumer staples usually decline less than the broader market.
This time, however, these sectors have not provided much protection.
In the United States, the S&P 500 utilities sector has dropped about 1% this week, while consumer staples have fallen 2.8%, even as the broader S&P 500 remains roughly flat.
European markets show a similar pattern. Utilities are down 3%, while consumer staples have fallen 4.5%, compared with a 3% decline in the STOXX 600 index.
Part of the explanation is that these sectors had already been performing well before the recent geopolitical tensions. Investors had been allocating capital to “hard assets” such as infrastructure and industrial companies, pushing valuations higher.
James Bristow, portfolio manager at Templeton Global Investments, noted that investors must be increasingly selective when buying defensive stocks in today’s higher interest rate environment.
He added that while some companies may offer value opportunities, the margin of safety depends heavily on the price at which the shares are purchased.
