Gold Is Now The Last Standing Safe Haven

February 23, 2015



The second factor is quantitative easing (QR) in the EU. It entails the creation of money to buy the government debt of euro-zone countries aimed at pushing down the value of the euro. That QE, in turn, requires the SNB to print more francs to maintain the cap. This comes after the SNB’s balance sheet rose from 100 billion Swiss francs in 2009 to 524 billion francs in 2014.


That made the SNB the central bank with the biggest balance-sheet-to-GDP ratio among developed nations at nearly 80 percent among developed countries, compared to the 22 percent for the Federal Reserve.


The Swiss bank didn’t want to buy more euros because it would make Switzerland too sensitive to swings on the forex market. Switzerland’s foreign exchange reserves in euro-denominated assets amount to around 40 percent of its balance sheets, while the Swiss export to the eurozone have been declining. This matters, because 45 percent of the Swiss National Bank’s shares are held by private shareholders who receive dividends from the central bank. The rest is owned by the cantons, which also care about cash transfers from the SNB.


Falling Interest Rates

Interest rates have continued to fall further since the SNB abandoned its peg. This is because of the sudden unwinding of the carry trade between Swiss francs and higher-yielding euro assets.

This trade was safe with the franc pegged to the euro. When the peg was lifted, investors were sudennly faced with a staggering loss incurred in a very short time. With negative rates out to 15 years, it’s likely close to over. But, according to a survey by Bloomberg News on Feb. 18, the Swiss National Bank will cut interest rates again in an effort to head off economic damage from the franc’s surge.


Another important piece of this puzzle is what is happening to U.S. Treasurys. After all, Treasurys are the other safe haven.


From a broad policy perspective, Basel III capital requirement regulations have increased U.S. banks’ demand for Treasurys, helping to depress yields at the short end of the curve. What’s more, the continued phasing in of regulations suggests that these effects will persist for some time, though probably not on longer maturities.


The takeaway is this: gold may well turn out to be the safe haven of choice for some time. That’s because implementation of the latest Basel banking regulations and the decline in Swiss yields as the Eurozone continues to struggle. So it is that gold and gold ETFs such as GLD and IAU have secure places as the only safe havens in a low or negative interest rate world.


Cougar Global has held both GLD and IAU in client portfolios.


Deborah Frame CFA is vice president of investments and chief compliance officer at Cougar Global. She leads the research team there, including macroeconomic, market environment and asset class correlation research used in the firm’s qualitative and quantitative asset allocation models that focus on downside risk optimization and the use of ETFs. She is co-head of the Canadian Regional Chapter of Women in ETFs.

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