What other safe-haven assets are there besides gold?

Core Viewpoints

The categories of broad hedging assets are quite extensive, with gold, currency, bonds, dividends, and commodities being the most common. Among these, gold, currency, bonds, and commodities are the most classic.

In different hedging scenarios, the performance ranking of hedging assets varies, as we emphasize, "there are no absolute hedging assets, only the relative hedging attributes of assets."

Common hedging scenarios can be classified into three categories—deflation, stagflation, and financial order reconstruction. We identified six classic hedging scenarios in history and reached the following conclusions:

In a deflation scenario, bonds are optimal, currency and gold are in the middle, and commodities are the weakest.

In a stagflation scenario, commodities and gold are optimal, currencies of countries with growth potential perform next, and bonds are the weakest.

In a financial order reconstruction scenario, gold is optimal, third-party currencies are next, and commodities and world currencies perform the weakest.

This round of trade war has a different impact on the global economic, financial, and political landscape than before, and it will gradually deepen in the future. Beyond gold, different hedging assets will experience rotation at different stages of the trade war.

Summary

1. What are hedging assets? Hedging motives and asset types

Hedging assets refer to those whose intrinsic value can remain stable when other assets experience significant volatility. Hedging assets have two fundamental characteristics: one is downside resistance, and the other is high credit.

Downside resistance means that during a general decline in asset prices, hedging assets need to decline less. Hedging is about minimizing losses as much as possible.

High credit means that only high credit can provide high liquidity, allowing them to maintain a stable pricing advantage during the depreciation of most other assets. This is also the source of the "downside resistance" of hedging asset value.

There are roughly three layers of risk scenarios, and different types of hedging assets perform differently in these three categories of scenarios.

The first layer of risk scenarios is economic recession risk (deflation scenario, demand decline + liquidity easing).

The second layer of risk scenarios is political order conflict (stagflation scenario, demand decline + supply constraints + liquidity tightening).

The third layer of risk scenarios is financial order reconstruction (the status of world currencies is challenged, demand decline + currency dilemma).

2. The first type of hedging scenario, typical deflation scenario (monetary easing + demand decline).

① General rule: In the ranking of hedging assets, bonds are optimal, with currency and gold included, and commodities are the weakest.

② One structural rule: In a deflation process, the country with greater monetary easing will have better relative bond returns; conversely, the currency will be relatively weak. For example, in 2001, Japan experienced more severe deflation and greater monetary easing, making Japanese bonds significantly better; the yen underperformed. In 2008, the U.S. was the initiator of the global financial crisis, with significant monetary easing, making U.S. bonds relatively superior, while the dollar underperformed.

③ Another structural rule: Assets that can reflect growth potential will not perform too poorly during deflation, while assets related to the source of deflation will perform relatively weak. For example, in 2001, the internet bubble increased deflationary pressure in Japan, leading to weak performance in Japanese stocks and the yen. In 2001, the potential momentum of U.S. real estate was strong, and U.S. REITs performed optimally at that time. Conversely, in 2008, the global financial crisis originated from the U.S. subprime mortgage crisis, resulting in the worst performance of U.S. REITs during the deflation process from 2008 to 2009 III. Second type of hedging scenario, typical stagflation scenario (monetary tightening + demand decline + supply contraction).

① General rule: In the ranking of hedging assets, commodities and gold are optimal, followed by currency, and bonds are the weakest.

② One structural rule: During stagflation, different countries have varying underlying development potentials. Countries with stronger development potential can see their currencies perform more strongly. For example, from 1973 to 1974, Japan was in a period of robust development, hence the yen at that time was significantly stronger than the pound and the dollar. In 2022, due to fiscal expansion and technology capital expenditure, the U.S. economy was "the only star," and the dollar also performed significantly better than other currencies.

IV. Third type of hedging scenario, reshaping of the global financial order (monetary dilemma + demand decline).

① General rule: In the ranking of hedging assets, gold is optimal, while commodities and world currencies perform the weakest.

② One structural rule: During the reconstruction of the financial order, gold is the most certain asset. At the same time, the world currency, which serves as the anchor of the financial order, performs the weakest. During the reconstruction of the financial order, global demand is suppressed, leading to weak performance in commodities.

③ Second structural rule: During the reconstruction of the financial order, a type of currency outside of the world currency is often viewed as a substitute for the world currency and tends to perform well. For example, during the depreciation of the pound in the 1929-1930s, the dollar appreciated relative to the pound. In 1961, during the dollar crisis, the yen appreciated relative to the dollar.

V. Rotation of hedging assets under the context of the current trade war

Under the current trade war scenario, the global manufacturing production sentiment is hindered, and the inflation risk in upstream production is low. Subsequent risk scenarios are considered in different contexts.

Scenario 1: Early stage of tariff game (early April), market pricing for U.S. stagflation, non-U.S. deflation, and challenges to dollar credit.

This tariff game began with the U.S. unilaterally initiating tariff shocks (reciprocal tariffs in April), challenging dollar credit. Stuck in "stagflation" expectations, the U.S. cannot promptly implement monetary easing.

Gold performs the best, the safe-haven attributes of the euro and yen strengthen, U.S. bonds are weak, and U.S. bonds underperform compared to bonds from other countries; commodities and the dollar (world currency) perform the worst.

This asset performance aligns well with the hedging logic of U.S. stagflation and non-U.S. deflation.

Scenario 2: The tariff game enters deep waters (after mid-April), market pricing for global order reconstruction and volatility in global financial markets.

As the tariff game enters deep waters, the market begins to price in the real global demand after export grabbing, with limited recovery for the dollar.

Moreover, as the tariff game enters deep waters, the degree of global political and financial competition intensifies, and the logic of financial hedging heats up again.

Entering May, financial volatility increases, and the world begins to enter a reconstruction of the financial order, during which gold remains a good choice for hedging assets. Additionally, the yen appreciates significantly against the dollar. This asset performance aligns well with the hedging logic during the reconstruction of the financial order.

Scenario 3: If the tariff shock leads to a global economic downturn, global pricing reflects a recession. Despite the fact that different countries may exhibit varying inflation performances during the game, their policies and derivative impacts in response to tariffs also differ. However, the ultimate effect of the tariff game will certainly be a decline in global demand.

Once the inflation center stabilizes and the uncertainties during the tariff game dissipate, the world may eventually price in a round of recession. In this process, the most certain safe-haven asset may be bonds.

Main Text

What are safe-haven assets? Motivations for hedging and types of assets

(1) The underlying logic of safe-haven assets

Safe-haven assets refer to those whose intrinsic value remains stable even when other assets experience significant volatility. Safe-haven assets have two fundamental characteristics: one is downside protection, and the other is high credit quality.

Characteristic one: downside protection. During a broad decline in asset prices, safe-haven assets need to decline less. The so-called hedging is to minimize losses as much as possible.

Characteristic two: high credit quality. Only high credit quality can ensure high liquidity, allowing them to maintain a stable pricing advantage during the depreciation of most other assets. This is also the source of the "downside protection" value of safe-haven assets.

An appropriate allocation of safe-haven assets can reduce systemic risk in a portfolio, enhance return stability, and lower portfolio volatility.

Safe-haven assets are characterized by low volatility and low returns, determined by their inherent characteristics of downside protection and high credit quality.

Safe-haven assets have a low correlation with other risk assets. A unique feature of safe-haven assets is that in extreme situations, there is a negative correlation between safe-haven assets and other assets or their combinations. Even in normal times, the correlation between safe-haven assets and other assets or asset combinations is also weak.

(2) Classification of safe-haven asset scenarios

Broadly defined, safe-haven assets encompass five categories: gold, currencies, bonds, defensive sectors in equities (dividends), and commodities. These five asset classes are not completely positively correlated, indicating that the most advantageous safe-haven asset varies in different scenarios.

There are roughly three layers of risk scenarios, and different types of safe-haven assets perform differently in these three scenarios.

The first layer of risk scenarios is the risk of economic recession (deflation scenario, demand decline + liquidity easing).

The corresponding economic scenario is quite common, usually targeting the risk of cyclical economic recession. Crises triggered by demand-side issues, similar to typical financial and economic crises, are often accompanied by monetary easing and a low inflation pattern (economic recession). Safe-haven assets benefiting from monetary easing are the most advantageous, while during periods of declining demand, commodity prices fall, and commodities perform worse than other assets The second layer of risk scenarios is political order conflict (stagflation scenario, demand downturn + supply constraints).

The corresponding economic scenario is usually characterized by fragmented supply chains and rising inflation. In this situation, monetary tightening occurs, and commodity prices soar. Therefore, liquidity-sensitive safe-haven assets perform the weakest, while commodities with rapid price increases are the most favored assets.

The third layer of risk scenarios is financial order reconstruction.

The corresponding economic scenario is relatively rare, where the growth cycle slows down while the liquidity of the dominant country's credit currency is relatively tight, exacerbating the monetary trust crisis. At this time, liquidity-sensitive bonds and other safe-haven assets cannot benefit from monetary easing to perform better, and commodities also perform weakly due to demand downturn. In this case, gold, which has monetary properties, may be the optimal safe-haven asset.

After clarifying the three scenarios for safe-haven assets, we will review historical contexts and analyze the performance of safe-haven assets under these three scenarios.

Safe-haven scenario 1, economic cyclical downturn

In a classic economic cyclical downturn, there are two macro clues: insufficient demand and loose liquidity. Under this combination, liquidity-sensitive safe-haven assets (such as bonds) perform the best. We will illustrate this with two examples: one period is from 2000 to 2002 during the burst of the internet bubble, and the other period is from 2008 to 2009 during the global financial tsunami triggered by the U.S. subprime mortgage crisis.

(1) Internet Bubble Crisis (2000-2002)

From 2000 to 2002, after the tech bubble burst, global GDP growth rate significantly slowed down, and deflationary pressures intensified.

From early 1995 to March 10, 2000, the Nasdaq rose from 743 points to 5,132 points, an increase of 590%. Subsequently, the bubble burst, and the Nasdaq fell a cumulative 78% over 21 months, bottoming out in October 2002.

The burst of the tech bubble impacted the U.S. economy, leading to a decline in GDP growth and an increase in unemployment. The U.S. real GDP growth rate fell from 5.3% in the second quarter of 2000 to 0.15% in the fourth quarter of 2001. The unemployment rate rose from 4% in the second quarter of 2002 to 6.3% in the second quarter of 2003.

The tech bubble burst also affected the overall economy of developed countries in Europe and America, with significant declines in economic growth. In 2001, global GDP plummeted from 4.8% in 2000 to 2.3%.

From 2001 to 2002, global deflationary pressures intensified, and the deflationary pressure in the U.S. continued until 2003.

In response to the impact of the internet bubble crisis, developed economies implemented significant monetary easing.

The Federal Reserve began a series of 11 interest rate cuts starting in December 2000, with the federal funds rate decreasing from 6.5% at the end of 2000 to 1% in June 2003, maintaining the 1% level until June 2004 The European Central Bank (ECB) has cut interest rates four times, with two cuts of 50 basis points and two cuts of 25 basis points, totaling a reduction of 150 basis points. The Bank of Japan (BOJ) not only lowered the official discount rate three times, reducing it from 0.5% at the beginning of the year to 0.1%, but also adjusted the framework of its monetary policy operations (QE1), changing the operational target from the interbank lending market rate to the balance of financial institutions' current deposits at the central bank. The BOJ, using the new monetary policy framework, not only injected a large amount of central bank funds into the money market but also increased the scale of its one-way purchases of long-term government bonds from 4 trillion yen per month to over 8 trillion yen.

During the core phase of the tech bubble burst (March 2000 - October 2002), the ranking of safe-haven assets was as follows: the best was REITs, followed by bonds, then gold, and then major world currencies. Defensive sectors in the U.S. stock market performed relatively well.

The specific asset performance was as follows: U.S. REITs (42%) > [Japanese bonds (40%) > U.S. bonds (37%) > German bonds (16%)] > gold (11%) > [U.S. dollar (2%) > euro (2%)] > crude oil (0%) > yen (-10%) > copper (-15%) > S&P 500 (-41%) > Nasdaq (-74%).

During the tech bubble burst, U.S. REITs achieved an annualized return of over 10% (including dividends) due to their stable cash flow and defensive attributes, becoming one of the few asset classes to outperform the market. This performance validated the hedging value of REITs during economic downturns.

In the crisis phase, traditional defensive sectors in the U.S. stock market showed relative resilience, with the consumer staples and healthcare sectors recording returns of +23% and -4%, respectively, significantly outperforming the S&P 500's performance (-41%) during the same period.

In terms of major currencies, the U.S. dollar and euro performed steadily, while the yen's safe-haven attributes weakened, primarily due to intensified domestic deflation and Japan's implementation of QE. Correspondingly, Japanese bond yields significantly outperformed U.S. and European bonds.

In the early stages of interest rate cuts, the U.S. dollar experienced a temporary strengthening due to safe-haven demand. Although the eurozone economy struggled to avoid the impact of the U.S. economic recession, it still maintained positive growth (1.3% growth for the entire year of 2001), showing relative resilience.

The Japanese economy fell back into recession, with a significant decline in exports leading to a noticeable drop in industrial production year-on-year, and deflation intensified, resulting in poor performance of the yen. During this phase, Japan began implementing QE, with a degree of easing that was rare globally at the time. This phase saw a rapid decline in Japanese bond yields.

(2) The U.S. Subprime Mortgage Crisis (2008-2009)

The global financial crisis of 2008 was triggered by the U.S. real estate and credit bubble. As risks in the banking system spread to other markets and the real economy, global economic activity declined, and inflation expectations shifted to deflation.

In the second half of 2007, the U.S. subprime mortgage crisis erupted. It began with housing mortgage companies, and in early April 2007, the second-largest subprime mortgage lender in the U.S., New Century Financial Corporation, filed for bankruptcy, followed by more than 30 subprime mortgage companies shutting down or going bankrupt. Entering 2008, the financial crisis triggered by the subprime crisis spread and escalated, with large financial institutions facing distress, marked by the bankruptcy of Lehman Brothers in September 2008.

As risks in the banking system transmitted to the real economy, the global economy generally declined, and inflation expectations shifted to deflation.

The U.S. real GDP fell from 1.15% in the first quarter of 2008 to -3.92% in the second quarter of 2009. Japan's real economic growth rate was -0.7% in 2008, with the fourth quarter GDP declining at an annualized rate of 12.7%. Germany's economy declined by 0.4% and 0.5% in the second and third quarters of 2008, respectively. The UK economy experienced negative growth of 0.6% and 1.5% in the third and fourth quarters of 2008, respectively, while France's economic growth for the entire year of 2008 fell to 0.7%.

In terms of inflation, after the full outbreak of the financial crisis (starting in September 2008), the unemployment rate rose, and commodity prices plummeted. Oil prices fell to $30 per barrel, and inflation quickly shifted to deflation.

In response to the financial crisis, developed economies implemented continuous accommodative monetary policies and gradually adopted quantitative easing.

From September 2007 to April 2008, the Federal Reserve cut interest rates seven times in response to the crisis, lowering the policy rate to 2%. In the fourth quarter of 2008, the Federal Reserve initiated quantitative easing.

The Bank of Japan maintained low interest rates after deciding on October 5, 2010, to lower the overnight lending rate to a range of 0.0%-0.1%. This marked the Bank of Japan's return to a zero interest rate policy after four years and further strengthened its quantitative easing policy (QE2), establishing a temporary fund of 60 trillion yen for purchasing long-term Japanese government bonds, commercial paper, asset-backed commercial securities, and corporate bonds.

During the peak of the financial crisis (September 2008 to March 2009), the ranking of safe-haven assets was: bonds first, followed by currencies, then gold, with commodities lagging behind, and REITs performing the weakest. In addition, REITs have an average decline greater than the overall market. Stocks are weak, but overall, defensive sectors are relatively resilient.

Specific asset performance: German bonds (26%) > US bonds (24%) > Japanese yen (18%) > Japanese bonds (13%) > gold (11%) > US dollar (10%) > euro (-9%) > Nasdaq (-35%) > S&P (-38%) > copper (-45%) > crude oil (-53%) > REITs (-55%).

REITs performed weakly during the subprime mortgage crisis, stemming from the high correlation between the underlying assets of mortgage-type REITs and subprime loans.

In the US stock market, defensive sectors such as communication services, healthcare, and utilities recorded -11%, -20%, and -22%, respectively, which were more resilient compared to the S&P 500's performance (-32%) during the same period.

In terms of major currencies, the safe-haven attributes of the Japanese yen and the US dollar were amplified, while the euro performed poorly.

A large-scale unwinding of yen carry trades occurred, leading to a significant appreciation of the yen. After 2000, the Bank of Japan maintained low interest rates for an extended period, making yen carry trades exceptionally active. Before the outbreak of the 2008 financial crisis, at least hundreds of billions of dollars were invested in yen carry trades, mostly in higher-yielding risk assets. After the US housing market bubble burst, there was a large-scale unwinding of yen carry trades, resulting in a significant appreciation of the yen.

The safe-haven attributes of the US dollar were strengthened during the peak of the crisis. From September 2008 to November 2008, the US dollar index rose by a cumulative 15%. During this period, the trading logic of the dollar index was driven by risk aversion and liquidity, showing a high correlation with the VIX index and TED spread.

The seeds of the sovereign debt crisis were sown, leading to the depreciation of the euro. The European debt crisis first erupted in Greece in 2009, followed by fiscal crises in several countries including Italy, Portugal, Spain, France, and Germany. A combination of factors caused the euro to continue to decline.

Risk scenario 2: Political order conflict scenario

The fragility of the supply chain leads to a coexistence of tight monetary conditions and high inflation, while demand is relatively weak. Logically, demand-related assets are weak, and liquidity-sensitive assets are also weak. Relatively speaking, high inflation-sensitive assets (mainly commodities) perform the best.

(1) The two oil crises of the 1970s drove widespread stagflation

The two oil crises of the 1970s caused supply shocks that triggered persistent inflation, leading to a significant slowdown in global economic growth. The first oil crisis occurred in 1973-1974. The OPEC oil embargo contributed to rising oil prices, with the U.S. energy CPI peaking at 33.7% year-on-year in September 1974.

Globally, the combination of oil supply shortages and food supply crises led to a rapid rise in global inflation, creating supply shocks for major economies and affecting overall economic output levels, with economic growth rates declining across countries. Among them, the UK and Japan performed poorly in terms of economic growth and inflation levels, with inflation in the UK and Japan rising significantly, and the CPI increase far exceeding that of the U.S. and Germany, leading to negative economic growth rates.

The second oil crisis occurred in 1979-1980. At the end of 1978, Iran experienced severe political turmoil, halting oil exports for 60 days, causing oil prices to surge. On September 20, 1980, the Iran-Iraq War broke out, completely halting oil production in both countries, disrupting the fragile supply-demand relationship in the global crude oil market at the time, which triggered a global economic crisis.

The second oil crisis in 1979 led to another rise in international crude oil prices, with U.S. energy inflation reaching 37.5% in December 1979, pushing both CPI and PPI upward. The overall U.S. CPI year-on-year was 13.3%, exceeding the highest inflation level of 1973. The U.S. GDP growth rate plummeted from 5.5% in 1978 to -0.3% in 1980, with total manufacturing output declining by 0.23% year-on-year and the unemployment rate rising to over 10%.

This oil crisis resulted in a major global recession, accompanied by sustained price increases. By the end of the 1970s, except for the UK and Norway, which had lower inflation rates due to North Sea oil, the average inflation rates in other Western European countries and Japan were above 5%. The economic recession also led to rising unemployment rates. After the outbreak of the second oil crisis, 35 million people in the U.S. and Europe were unemployed, accounting for 11% of the working-age population. One-eighth of workers in the U.S., Belgium, and Denmark received unemployment benefits.

In response to the crisis, major economies implemented monetary tightening policies during the peak of the oil crisis, significantly raising interest rates.

The monetary policy response to stagflation in the U.S. and the UK during the 1970s can be divided into two phases: the initial attempt at easing or mixed policies failed, leading to a later shift towards tightening monetary policy, especially through significant interest rate hikes and controlling money supply. The U.S. once raised interest rates to 20%, while the UK raised rates to 17%.

Asset ranking: commodities and gold are optimal, followed by currency, while liquidity-sensitive assets like bonds are weaker. Additionally, the performance of currency and equities is deeply related to the economic fundamentals of the dominant countries.

During the peak period of the first crisis (1973-1974), asset performance ranking was: crude oil (395%) > gold (183%) > copper (15%) > yen (0%) > pound (-1%) > dollar (-10%) > U.S. bonds (-15%) > German bonds (-15%) > Japanese bonds (-25%) > S&P (-43%) > Nasdaq (-56%) > REITS (-58%) During the peak period of the second crisis (1979-1980), asset performance ranking: Gold (162%) > Crude Oil (112%) > Nasdaq (60%) > REITS (55%) > S&P (34%) > British Pound (17%) > Copper (13%) > US Dollar (4%) > Japanese Yen (-6%) > Euro (-7%) > German Bonds (-30%) > US Bonds (-41%) > Japanese Bonds (-43%).

In both crises, the performance of the US dollar and US stocks showed divergence, which is related to the different stages of the US economic fundamentals and monetary policy.

During the first crisis, the US was in a period of economic transformation pain, and the relatively lagging tightening policy led to a loss of confidence in the US dollar, resulting in poor performance for both US stocks and the dollar. In the second crisis, Volcker's aggressive interest rate hikes temporarily supported the dollar, while the US technology sector began to emerge, injecting new growth expectations into the market, leading to positive returns for both the dollar and US stocks.

(2) The 2022 Russia-Ukraine conflict led to soaring energy prices

The 2022 Russia-Ukraine geopolitical conflict triggered severe fluctuations in the energy and agricultural commodity markets, exacerbating global debt and financial risks.

According to estimates by the International Monetary Fund, the global economic growth rate in 2022 was 3.4%, a decrease of 2.6 percentage points from 2021. Among them, developed economies fell by 2.5 percentage points, and emerging economies fell by 2.7 percentage points. In terms of major economies, the GDP growth rate of the US in the first and second quarters was negative, growing by 3.2% in the third quarter, and slowing to 2.7% in the fourth quarter; the GDP growth rates of the Eurozone, Japan, and the UK showed a pattern of high first and low later; emerging economies such as India, Malaysia, Thailand, and Mexico also exhibited a trend of high first and low later in economic growth.

Due to a tightening labor market post-pandemic, soaring commodity prices, and supply chain recovery being affected after the Russia-Ukraine conflict, global inflation surged significantly. The average inflation rate in 2022 reached 8.8%, the highest since 2000. The US CPI once reached 9.1% (the highest in nearly 41 years), while energy prices in the Eurozone pushed inflation above 10%. In emerging markets, inflation rates in Argentina and Turkey exceeded 70% In order to catch up with the rising inflation, central banks around the world began a significant interest rate hike cycle in 2022.

Emerging markets took the lead, with an average interest rate increase of 600 basis points over the course of a year; the Federal Reserve started raising rates in March, with a total increase of 425 basis points for the year; the European region delayed its rate hikes until June, with an average increase of 250 basis points for the year.

In 2022, the Federal Reserve raised rates 7 times, increasing the target policy rate by 425 basis points to 4.5%, the fastest tightening pace since the seven rounds of rate hikes since 1983; the European Central Bank and the Bank of England raised rates by 250 and 325 basis points respectively; although the Bank of Japan did not raise rates, it expanded the target range for 10-year government bond yields at the end of the year, sending a "hawkish" signal. Central banks in emerging economies generally followed suit with significant rate hikes, with the weighted average policy rates of 25 central banks including India, Indonesia, Brazil, and South Africa rising by more than 4.5 percentage points to 7% by the end of 2022.

During the peak crisis period (February-April 2022), commodities (energy) performed the best, followed by gold; in terms of currencies, the US dollar stood out, while other currencies and bonds recorded negative returns. The defensive sectors of REITS and stocks also exhibited phase-specific safe-haven characteristics, with the energy sector benefiting significantly.

During the peak crisis period (February-April 2022), the asset ranking was primarily: crude oil (24%) > gold (6%) > US dollar (5%) > copper (4%) > REITS (1%) > S&P (-4%) > euro (-5%) > pound (-5%) > yen (-7%) > Nasdaq (-8%) > US Treasuries (-56%) > Japanese bonds (-70%).

In the US stock market, traditional defensive sectors such as utilities and consumer staples recorded positive returns. The energy sector performed best due to the significant rise in energy prices.

In terms of currency, the Federal Reserve's interest rate hikes (monetary policy shift) had spillover effects, leading to the appreciation of the US dollar and the depreciation of many other currencies. The euro to US dollar exchange rate briefly fell below parity, while the yen and pound against the US dollar reached their lowest levels since 1990 and 1985, respectively.

Safe-haven scenario 3, reconstruction of the global financial order

The scenario of financial order reconstruction is different from deflation and also different from stagflation. Compared to the deflation period, financial order reconstruction also faces a state of shrinking demand, but during the deflation period, central banks implemented monetary easing and liquidity was abundant. However, during the financial order reconstruction period, major economies may not choose liquidity easing to balance capital flow and monetary stability Compared to the period of stagflation, the reconstruction of the financial order faces shocks to monetary credit, but during stagflation, upstream commodity prices are strong, while the reconstruction period corresponds to weak commodities.

(1) The Great Depression 1929-1932

The stock market crash in New York in October 1929 triggered financial panic, leading to a wave of bank failures and a rapid transmission of credit tightening to the real economy.

During the Great Depression in the United States (1929-1933), economic data collapsed comprehensively. Nominal GDP fell by 45%, with personal consumption expenditures down 41%, private investment down 87%, and exports down 67%. The tariff war caused trade volume to decrease by two-thirds. At the same time, the suppression of personal consumption and investment during the Great Depression was also very evident.

To respond to the crisis, the Federal Reserve initially raised interest rates multiple times to attract international capital inflows (to prevent gold outflows).

In the early stages of the 1929 crisis, the Federal Reserve raised interest rates multiple times to attract international capital inflows (to prevent gold outflows) and curb stock market speculation. The discount rate rose to 6.0% in September 1929, and the stock market crashed in October, leading to the bursting of the asset bubble.

Starting in 1930, the Federal Reserve continuously lowered the discount rate, which fell to 1.5% by 1931; however, constrained by the need to stabilize exchange rates, the Federal Reserve's loose monetary policy experienced fluctuations.

During this period, among safe-haven assets, gold was the best, followed by currency and bonds, while commodities performed the worst.

According to NBER classification, the Great Depression lasted from August 1929 to March 1933. Gold (69%) > USD against GBP (12%) > US Treasuries (8%) > oil prices (-50%) > copper prices (-72%) > S&P (-79%).

At that time, the world currency was the British pound. During the Great Depression, the financial order was reconstructed, and the pound index depreciated overall.

During the Great Depression (1929-1933), the real purchasing power of the dollar decreased, but due to a relatively tight monetary policy and a later abandonment of the gold standard, the dollar appreciated against foreign currencies.

Gold underwent a value reassessment, and the Roosevelt administration exited the gold standard through the Gold Reserve Act, raising the official price of gold from $20.67 to $35 per ounce, achieving a nominal increase of 69%.

(2) The 1961 Dollar Crisis

The background of the 1961 dollar crisis was the economic downturn and capital outflow under the global rebalancing pattern.

In the early 1960s, the U.S. economy fell into its fourth post-war recession. At the same time, there were issues such as arbitrage opportunities between U.S. and European interest rates, leading to significant outflows of U.S. capital and gold reserves, triggering the dollar crisis.

From April 1960 to February 1961, the U.S. economy entered its fourth economic recession since the end of World War II. During this period, the economic growth rate fell into negative territory, with industrial production declining and the unemployment rate rising rapidly.

From 1958 to 1960, the U.S. lost approximately $8.4 billion in gold, while Western European countries accumulated a large amount of dollar reserves through international trade surpluses. In October 1960, the first dollar crisis broke out, and from 1960 to 1961, the outflow of gold reserves accelerated, and the capital account deficit widened. As U.S. gold reserves ($17.8 billion) fell below short-term foreign liabilities ($21 billion), it triggered a wave of dollar selling and gold buying. The gold price in London soared to $40.6 per ounce, far exceeding the official price ($35 per ounce).

The recession in the U.S. economy began before the outbreak of the dollar crisis; the NBER defined this recession as starting in April 1960. Under the influence of continuous capital outflows, private sector investment significantly slowed down, and economic activity began to decline, leading to a rapid drop in economic growth. After the outbreak of the dollar crisis, the economy began to accelerate its downward trend, with GDP in the first quarter of 1961 experiencing negative growth before starting to recover.

Globally, in 1960, the U.S. GDP accounted for 39% of the world total, but by 1961, this share had dropped to 35.14%, with the rise of the Soviet Union, Japan, and Western European countries. From 1960 to 1961, global economic growth exhibited the characteristic of "East rising and West declining": the rapid growth of countries like the Soviet Union, Eastern Europe, and Japan offset the brief recession in the U.S.

In terms of prices, from 1960 to 1961, the U.S. inflation rate remained in a moderate range of 1%-1.5%. The slowdown in economic growth and the rising unemployment rate led to a simultaneous decline in CPI and core CPI.

To cope with this round of economic recession and the dollar crisis, the Federal Reserve's monetary policy was caught in a dilemma. On one hand, the weak economy required easing credit and lowering interest rates; on the other hand, in an environment of capital outflow, it was difficult for the Federal Reserve to implement a smooth and significant easing without inducing further capital flight from the U.S.

The Federal Reserve's easing policy was constrained, as lowering interest rates could further stimulate capital outflows. The Federal Reserve shifted to an easing policy in 1960, with a slight interest rate cut during the year, reducing the discount rate from 4% to 3%; starting in February 1961, the Federal Reserve, in conjunction with the Treasury, implemented "Operation Twist" (OT): selling short-term government bonds and buying long-term government bonds, aiming to lower long-term interest rates to stimulate investment while maintaining short-term rates to curb capital outflows.

During the 1960-1961 crisis, gold was the best-performing safe-haven asset, followed by bonds, while commodities performed the weakest. The NBER defines the current recession as occurring from April 1960 to February 1961, during which asset performance rankings were: gold (16%) > U.S. Treasuries (13%) > S&P (10%) > German bonds (7%) > crude oil (-4%) > copper (-17%).

During this period, the U.S. dollar was the world currency. Although a fixed exchange rate system pegged to the dollar was implemented, the dollar crisis still led to the depreciation of the dollar against other currencies, such as the dollar against the yen.

Valuation-driven performance characterized the U.S. stock market, with limited suppression of investor risk appetite from shocks like economic recession and the dollar crisis. The U.S. stock market performed strongly from 1960 to 1961, with breakthroughs in electronics and aerospace technology sparking an "electronic boom." The rise in U.S. stocks during this phase was mainly driven by valuation, lacking earnings support. The price-to-earnings ratio of the S&P 500 rose from 13 times in 1960 to 22 times (close to the level of 1930), with some tech stocks reaching price-to-earnings ratios as high as 115 times.

In terms of currency, due to the fixed exchange rates adopted under the Bretton Woods system, the value of currencies remained relatively stable. For example, from 1949 to 1971, the exchange rate of the dollar to the yen was fixed at 360, and from 1949 to 1957, the exchange rate of the dollar to the pound was fixed at 2.8.

Summary of Characteristics of Safe-Haven Assets and Future Interpretations

(1) There are no absolute safe-haven assets, only relative safe-haven attributes.

The first type of safe-haven scenario is a typical deflationary scenario (monetary easing + declining demand).

① General rule: In the ranking of safe-haven assets, bonds are optimal, with currencies and gold included, while commodities are the weakest.

② One structural rule: In a deflationary process, the country with greater monetary easing will have better relative bond yields; conversely, the currency will be relatively weak. For example, in 2001, Japan experienced more severe deflation and greater monetary easing, making Japanese bonds significantly better; the yen underperformed. In 2008, the U.S. was the originator of the global financial crisis, with substantial monetary easing, leading to a relative advantage for U.S. Treasuries, while the dollar underperformed ③ Structural Rule Two: Assets that can reflect growth potential during deflation will not perform too poorly, while assets related to the source of deflation will perform weakly. For example, in 2001, the internet bubble increased deflationary pressure in Japan, leading to weak performance of Japanese stocks and the yen. In 2001, the potential momentum of the U.S. real estate market was strong, and at that time, U.S. REITs performed the best. In contrast, during the deflationary period from 2008 to 2009, which originated from the U.S. subprime mortgage crisis, U.S. REITs performed the worst.

Second Scenario for Hedging: Typical Stagflation Scenario (Monetary Tightening + Demand Downturn + Supply Contraction).

① General Rule: In the ranking of hedging assets, commodities and gold are optimal, followed by currency, with bonds being the weakest.

② Structural Rule One: During stagflation, different countries have varying underlying development potential. Countries with stronger development potential can see their currencies perform more strongly. For example, from 1973 to 1974, Japan was in a period of robust development, and thus the yen significantly outperformed the pound and the dollar. In 2022, due to fiscal expansion and technology capital expenditure, the U.S. economy was "the only star," and the dollar also significantly outperformed other currencies.

Third Scenario for Hedging: Restructuring of Global Financial Order (Monetary Dilemma + Demand Downturn).

Gold is optimal, followed by bonds, while commodities and the world currency at that time perform relatively weakly.

① General Rule: In the ranking of hedging assets, gold is optimal, while commodities and world currencies perform the weakest.

② Structural Rule One: During the period of financial order reconstruction, gold is the most certain asset. Meanwhile, the world currency, which serves as the anchor of the financial order, performs the weakest. During the reconstruction of the financial order, global demand is suppressed, leading to weak performance of commodities.

② Structural Rule Two: During the period of financial order reconstruction, a type of currency outside of the world currency, viewed as a substitute for the world currency, often performs well. For example, in the 1929-1930s, the pound depreciated while the dollar appreciated relative to the pound. During the dollar crisis in 1961, the yen appreciated relative to the dollar.

(II) Rotation of Hedging Assets in the Context of Trade War Scenarios

This round of trade war is different from any trade game since World War II, as it is a comprehensive process of trade and financial order reconstruction. Moreover, as time progresses, the impact of the trade war on the global economy and finance also varies. Following the hedging asset investment framework, we can explore different types of hedging assets at different stages.

Scenario One: Early Stage of Tariff Game, Market Pricing U.S. Stagflation, Non-U.S. Deflation, and Challenge to Dollar Credit.

In the early stage of the tariff game, the market expects U.S. "stagflation," meaning a reduction in U.S. imports but an increase in prices. The price increase at this time mainly affects ordinary consumer goods in the U.S., rather than the rising prices of commodities like oil and gas. The so-called "deflation" in non-U.S. countries refers to the decline in exports to the U.S., leading to a contraction in global manufacturing and a drop in global upstream commodity prices.

Thus, this tariff game began with the U.S. unilaterally initiating tariff shocks, challenging dollar credit. Constrained by the expectation of "stagflation," the U.S. was unable to promptly implement monetary easing. Gold performed the best, while commodities and the dollar (world currency) performed the worst Scenario 2: The tariff game enters deep waters, market pricing reconstructs the global tariff order, and global financial markets fluctuate.

The tariff game has entered deep waters, as the interconnectedness of global production is stronger than at any time in history, so the actual increase in tariffs is not as strong as initially expected during the early stages of the trade game.

However, this does not mean that tariffs will come to a halt. This round of tariff games will ultimately feature "differentiated" and "tiered" tax rate designs. "Differentiated" refers to the United States implementing different tax rates for different countries, while "tiered" refers to the United States applying different tax rates to different products from China.

As the tariff game enters deep waters, the market begins to price the real global demand after export snatching. Moreover, as the tariff game enters deep waters, the degree of global political and financial maneuvering intensifies, and the logic of financial hedging heats up again. At that time, gold remains a good choice for a hedging asset. If any country implements monetary easing in response to declining demand, the bonds of those countries will also be good hedging assets.

Scenario 3: After the tariff game ends, based on historical experience, the world may enter a recession.

Although different countries may exhibit different inflation performances during the game, and their policies and derivative impacts in response to tariffs also vary, the ultimate effect of the tariff game will certainly be a decline in global demand.

Once the inflation center stabilizes and the uncertainties during the tariff game dissipate, the world may ultimately price in a recession. In this process, the most certain hedging asset may be bonds.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at their own risk