Ports In A Storm

11/05/2012 at 3:06 pm 1 comment

As Greece flirts with economic suicide and JP Morgan loses $2bn under the carpet, it is worth revisiting the subject of safe havens – those assets that receive attention from time to time as possible ports in a storm. We last looked at this back in July 2011, covering various government bonds, currencies, commodities – and cash. Events since the summer give us the opportunity to see how safe these havens really proved.

Starting with government bonds: lots of these went up. 10 year US Treasuries yielded 2.74% at the end of July; they now yield 1.86%. The equivalent German yield has fallen from 2.45% to 1.51% and ten year gilt yields from 2.80% to 1.95%. As well as coupon income over the period, therefore, investors in these kinds of bonds would have seen capital appreciation of the order of 7-8%.

Of the major currencies, the strongest was the dollar, which has risen 6.5% since last July as measured by the Bank of England’s trade weighted index. Sterling almost managed to keep pace, rising 5.9% on the same basis, and the yen drifted a bit higher too. The Scandinavian currencies softened slightly (-0.4% to -1.8%), dollar zone rates fell by a bit more (-3.6% to -5.4%), the euro lost 5.7% and the biggest faller was the Swiss franc (-7.9%).

The major commodities for which haven status is claimed are of course precious metals. Gold shot up during the stock market crash in August, reaching a peak of over $1,900 before falling back again to $1,580 today – about 2.4% lower over the period as a whole. Silver has performed dismally, losing over a quarter of its value at the same time.

Cash of course would not have lost its value. Banks have continued to fail since July (e.g. Dexia), but there have been no losses to retail deposit holders.

It would be unwise to draw anything axiomatic from this information, but tentative lessons might include the following:

  • If the banking system does not implode and one’s appetite for volatility is low, then cash is an obvious choice in a crisis. (Nonetheless, the UK Retail Price Index was 2.6% higher in March than it was eight months previously. This annualised inflation rate of 3.9% would have been impossible to match with a cash deposit rate.)
  • Currency views are genuinely speculative and exchange rate movements over a length of time such as 8-9 months are completely unpredictable.
  • The claims made for precious metals are exaggerated.
  • The most effective hedge against panic is government bonds (though only those seen as safe).

Of course every situation is different and the next crisis is unlikely to look much like the last. Perhaps the most robust conclusion remains the one we reached in July: that caution needs to be exercised. What looks like a hedge at first can sometimes be the edge of a cliff.

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Political Risk Dying Breed

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  • 1. Dying Breed « The Blog @ Vigilant Financial  |  08/06/2012 at 4:06 pm

    […] month we looked at the various refuges available to investors in the event of market panic. One of our conclusions was that: The most effective hedge against panic is government bonds […]

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