Is there such a thing as a real safe haven?
There are traditional relationships that the financial markets respect. For example, when the markets are tanking the world wants to own safe havens like the yen, the Swiss franc, U.S. debt and gold. If volatility spikes investors go into auto-mode and are almost pre-programmed to purchase these asset classes.
But just how safe are the safe havens? Both the Japanese and Swiss authorities intervened to limit the appreciation of their currencies in recent days. The Swiss National Bank (SNB) did so first by slashing interest rates and announcing a new QE program to flood the economy with money to try and put downward pressure on the franc. The Bank of Japan (BOJ) embarked on something similar, but they directly intervened and sold yen in the markets.
While some people will question the timing of the move, there can be no doubt that the Japanese and Swiss authorities don’t appreciate having currencies that are safe havens and will do all they can to try and break this association. The result has been volatility. The euro had rallied to record lows versus the Swiss franc before bouncing on news about the SNB. But once the dust settled investors went right back to doing what they have been told: buy yen and Swiss francs during market turbulence.
The essence of a safe haven should be stability. It needs to act in a predictable way during times of panic. However, the SNB and BOJ have turned this on its head. They are willing to fight the prevailing trend even if it means throwing good money after bad. But although the Swiss franc and the yen are both likely to keep their status for now, political risk for both currencies has surged higher.
So what about gold? It is considered the ultimate safe haven by some since it is not controlled by any government or central bank so there is no intervention risk. While that is technically true there are a couple of reasons why gold may not be as safe as everyone thinks it is. Firstly, it is traded on an exchange and that comes with its own set of risks. Margin calls can change if prices fall by a certain amount, also, as we saw last week, some investors are forced to sell gold and other “safe” assets to cover margin calls elsewhere, which means the price may not always react as you expect it to.
The ultimate safe haven is U.S. debt. The markets may be panicking about high levels of U.S. debt but they buy more of it. This argument is totally illogical but it is true. The reason why is that the U.S. debt market is the most liquid in the world. When investors get nervous they want something they can sell out of in an instant. Emerging markets may have stable debt levels; however their capital markets are far less developed than Treasuries. If you want to sell in a hurry you might find that there are no willing buyers and you are forced to hold on to it. This is what investors’ fear, so they flock to American markets not because they believe the U.S. debt problem is any better now than it was when the debt ceiling debate nearly caused a default, but because of its liquidity.
In reality there are no safe havens when the economic forecast starts to darken. But while the long-term outlook for the U.S.’s safe haven status is questionable, for now, no matter how illogical it may seem, the Treasury is the financial world’s favorite comfort food.
Image — An employee of a jewellery shop holds a 112.5 gram-weight gold pig during a photo opportunity at a jewellery shop at the Shinsegae department store in Seoul August 1, 2011. REUTERS/Jo Yong-Hak