Posts tagged ‘silver’
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.
For most of the last few weeks it was the Eurozone crisis. Now it’s the crisis in the US (debt or growth, take your pick). Whatever the reason, risk assets have been through panic after panic. And at the same time, certain assets, regarded as safe havens, have shot up.
The question is: how safe would these havens really prove in the face of a true financial catastrophe?
Government bonds are the classic escape for the risk averse. But in a world where the source of much of our panic is uncontrolled government debt – in other words, an embarrassment of such bonds – which ones to buy? The US has traditionally played the role of safest bond haven in the world, but a failure to raise the debt ceiling in a few days’ time, which would present the real prospect of an event of default, challenges this view. Likewise, the performance of the gilt market looks out of tune with an indebted, low-growth economy battling a deficit of 10% of GDP; and would those euro-denominated bunds really give investors such a smooth ride if the single currency were to collapse?
On the currency front, market behaviour is if anything more perplexing. One of the most notable beneficiaries of weak sentiment over the US has been the Japanese yen. The yen! Japan’s economy is contracting, its debt burden as a percentage of output is the highest in the world (it overtook Lebanon in 2008), it has terrible demographics and it has also experienced the worst nuclear accident for a generation and one of the worst earthquakes in living memory. Then there’s the Swiss franc – Switzerland’s fundamentals are enviable and it certainly has the benefit of a defensive location, but it would be far from immune to the effects of another financial crisis. Looking at the other top performers, Norway and Australia would surely be affected should a new recession provoke another slump in commodities – which leaves those economic superpowers, Canada and New Zealand.
We can write off equities while disaster has the upper hand; ditto, property.
Commodities too should suffer in a crisis, with the notable exception of gold and silver. Though even then, with precious metals prices where they are (in the case of gold, not much more than $200 off its all-time real terms high) and volatility high, the risk of sudden and painful capital loss should Armageddon fail to materialise takes the shine off them rather.
Which leaves cash. And with interest rates at record lows throughout the developed world, and inflation having picked up steam, investing in cash guarantees the erosion of your wealth in real terms.
In short, while there is the odd bond market, currency or commodity that might be expected to offer some upside in the event of another major crisis, investors need to tread carefully. What looks like a hedge at first can sometimes be the edge of a cliff.
If you are reading this by the window, take a look outside. That object hurtling towards the ground at breakneck speed is the silver price. Six days ago, it peaked at $48 an ounce; at the time of writing an ounce is worth $34, a fall of about 30% (it has fallen 2.5% this afternoon alone).
The trigger seems to have been an increase in margin requirements for futures trading in America. This evidently led to an unaffordable drain on available cash for many participants who were forced to close out positions. It must also have deterred new entrants from putting in extra money.
There has been a knock on effect in oil markets (Brent crude is down about 12% since silver peaked), and to a lesser extent in equity markets and other commodities. Comment has accordingly focused on supposed investor nerves about the economic recovery.
On a longer term view the story is less concerning. Silver remains up on the year, as does oil. In the latter case, the fall in price has merely seen it return to levels consistent with the upward trend established during the second half of 2010 (i.e. before the “Arab spring”). And investors should expect high short term volatility in the commodity space as a matter of course. Precious metals may well be in a bubble at the moment, but we should be cautious about interpreting these events as a popping sound.
However, this blog cannot help but wonder if there might be someone standing underneath the silver price waiting to be squashed as it lands. Readers may recall that in the autumn of 2006 a $9bn hedge fund called Amaranth collapsed after losing $6.5bn in a month purely by betting on the price of natural gas. The fall in silver may end up amounting to nothing. But it may be a cause – and effect – of similar distress right now.
Amaranth’s demise had little external significance, and if there are similar casualties over the coming days and weeks they may well be similarly manageable. That said, being long of silver (and gold) is a crowded trade. Some investors have taken physical delivery of their futures positions for extra security: if everyone tried that, physical supplies of precious metals would soon run out as the face value of futures contracts is a multiple of what is available. And Glencore’s IPO prices in 13 days.
These are, as ever, interesting times …