The chart shows the performance of the various havens described in the article. The purpose of safe havens is the preservation of principal, and these positions underperform in bull markets. Central bank intervention since the onset of the GFC has lowered interest rates in the hopes that cheaper money will spur economic growth.
Since this policy will continue indefinitely, people who turn to safe havens may continue losing principal in the short-term. However, if you think markets are unstable, and another meltdown is likely, this is the price you pay for protecting your principal.
Gold. Everyone has an opinion on gold. I believe that it’s a crowded trade, and investors should avoid crowded trades. Gold still has a purpose. If you believe that hyperinflation is possible, then holding physical gold in the form of bullion coins will enable you to exchange gold for the necessities of life in case the fiat currency system irretrievably breaks down.
This scenario seems very unlikely, but if you can afford a stash of gold bullion coins then you should consider buying some. Whenever I read this type of advice, pundits advise readers to buy the 1 oz. size exclusively to lower transaction costs. I recommend the opposite.
Whenever there is a currency crisis, part of the problem is an ability to make change for purchases. During the Civil War, the U.S. printed lots of greenbacks, but there were not enough coins to make change. People began using postage stamps and companies minted their own tokens that customers could redeem on their next shopping trip.
If faith in the dollar declines to zero and people begin accepting gold as payment, the ability to pay for things with 1/10 and 1/4 oz. coins will be quite useful. During a currency crisis, you do not want to wait for your next shopping trip to spend your store credit.
U.S. Dollar, aka cash. A more likely crisis scenario is Japan going bust or one of the Eurocrisis countries defaulting precipitating a worldwide financial crisis. In this instance, the U.S. will experience financial pain, but it will be the cleanest shirt in the hamper. The dollar tends to hold up well in crises even when the crisis starts in the U.S.
Bank deposits are insured up to $250,000 but earn virtually no interest. With inflation running about 2% a year, the principal is actually becoming less valuable. If you believe a crisis is around the corner, this may be an acceptable cost of insuring a portion of your wealth. Holding physical cash is also useful. When a bank fails, the FDIC will eventually pay, but depositors will lose access to their cash for a period of time. The more bank failures, the longer it will take to process them.
U.S. Treasuries. The United States has big fiscal problems. There has been a persistent deficit of over $1trn since the GFC and the debt to GDP ratio is rapidly approaching 100%. However, other countries would trade places with America in a heartbeat. The United States is a resource-rich, well-diversified economic powerhouse with a knack for getting out of trouble. This is both reality and perception.
The perception is important. The rest of the world sees the U.S. government as being the safest bet despite the issues facing the country. At the first hint of crisis, money will flock to treasuries. In the meantime, only the longest duration obligations earn more than the inflation rate. Your principal will slowly evaporate if it is invested in treasuries, not to mention the price risk from a sudden rise in yields. Once again, this may be an acceptable trade depending on your opinion on the stability of the world financial system.
Swiss Franc. Switzerland has a strong economy, an excellent financial situation and a renown banking system, but it is a small country with a population smaller than New York City.
Switzerland is a crowded trade with Europeans selling their euros to buy Swiss franc denominated deposits and financial instruments. Switzerland has responded by maintaining a strict ceiling on its exchange rate with the euro. The Swiss National Bank will continue this policy, so keep this in mind when considering the franc.
Pound Sterling. The U.K. was once a mighty empire, and as such there is a knee-jerk reaction to put money into sterling for safekeeping during a crisis. This perception should trump the reality of its economic picture. Currently, the U.K. is about to experience a triple-dip recession with an austerity program choking growth despite an easy monetary policy.
The problem with using the U.K. as a a safe haven is that it may trigger the next financial crisis. There are more likely candidates, but there is still a risk especially with talk of an EU exit.
German Bunds and the Euro. The crisis is not over. Large imbalances still exist between the periphery and core, and political instability is increasing. Note that the euro has appreciated over 10% since July, so there is not much upside here, too.
Europe is a good candidate for the next place to start a financial crisis. If the eurozone manages to remain intact, it will cost hundreds of billions of German euros to get the job done over the next decade, which does not bode well for bunds The euro is not a safe haven, though it can be a very lucrative speculative play.
Japanese Yen. Japan is a disaster waiting to happen. Let’s talk about hurricanes to drive the point home. There is a very strong chance of a massive hurricane hitting the southeastern U.S. No one could tell you the exact date one of these storms will hit, but the conditions in the area make it prone to such a catastrophe. There’s the warm water, the natural storm track from the Atlantic that ends in the region, and even the topography with land rarely rising to more than ten feet above sea level in the coastal regions. If you wait long enough, eventually you’ll experience a storm.
Japan has persistently high budget deficits, the highest debt to GDP ratio in the world, a demographic situation that is reducing tax revenues while raising expenditures at the worst possible time and a negative trade balance. It is also picking fights with its largest export market over rocks a thousand miles away from its main islands. I couldn’t tell you when the situation will come to head, but it will and lots of people will lose lots of money. Avoid.
Conclusion. We have been in uncharted territory since the onset of the GFC. No one knows what will happen next. Will it be a crisis from which we forge a new and improved world financial system? Will the current stagnation in the industrialized countries continue for years increasing economic inequality and poverty?
The only thing we can do is to continue to learn and use this knowledge to protect ourselves.