Financial storm exposes dangers of 'safe havens'

PUBLISHED : Tuesday, 27 September, 2011, 12:00am
UPDATED : Tuesday, 27 September, 2011, 12:00am


Suddenly all those safe haven assets that investment advisers have been pushing so enthusiastically over recent months don't look so safe after all.

You know the sort of things I mean. For the last year legions of brokers, wealth managers and self-proclaimed financial experts have been vigorously proclaiming their favourite alternative assets as the best refuge for investors in these times of economic turmoil.

We've been told that gold is the only secure store of value. We've heard that yuan deposits in Hong Kong can't lose. We've been advised to put our money into commodities like copper. And we've been told to buy safe haven currencies like the Swiss franc and the Singapore dollar. We've even been told to lay down fine wines as a leveraged play on China's insatiable thirst for conspicuous consumption.

After the last few weeks, however, all that advice looks sadly devalued. As concerns about the health of the US economy have grown and fears about an imminent Greek sovereign default have mounted, investors across the world have fled for safety.

But far from fleeing into the supposed safe haven assets that financial advisers have been promoting so assiduously, investors have dumped them in short order. Instead, they have sought shelter in the most traditional safe havens of all: the US dollar and the US Treasury market.

The sell-off has been brutal. At one point yesterday afternoon the gold price was down 20 per cent from the high it touched just three weeks ago.

Over the same interval crude oil has fallen 9 per cent, copper 20 per cent and silver a punishing 40 per cent.

The foreign exchange markets have been equally cruel, with Asia's floating currencies sinking like stones. The Singapore dollar, touted as 'the new Swiss franc', has slumped by 8 per cent against the US dollar since the beginning of this month.

On Friday the stampede into US dollars even pushed the value of the yuan in Hong Kong's offshore market fully 2 per cent below its value in the onshore market in Shanghai (see the first chart).

And in case you were wondering, vintage wines, which have been widely promoted as an alternative asset, uncorrelated with more traditional investments, have turned out not to be as uncorrelated as enthusiasts hoped. Since June the Liv-ex 50 fine wine index has fallen by 12 per cent (see the second chart).

But while the speed and the depth of the sell-off in many assets has clearly shocked investors, they really shouldn't have been so surprised.

After all, it's only three years since we last saw investors abandon the very same holdings in response to mounting financial turmoil, desperately trying to liquidate their assets in favour of cash.

As the subprime crisis deepened over the summer and autumn of 2008, the price of gold plunged by 32 per cent, the US dollar index climbed 23 per cent, and the price of fine wines sank by 22 per cent.

And the reason for the mass sell-off is much the same now as it was then. Having suffered painful losses on their stock holdings, investors have responded by cutting down their exposure to non-core assets.

With doubts growing about the liquidity of the international banking system and the integrity of some financial institutions in the event of a shock like a European sovereign default, investors have concluded that the only real safety is to be found by retreating to the deepest and most liquid markets of all: US dollar deposits and Treasury securities.

The trouble is that too many people bought into the same peripheral assets over recent months in search of safety. Now they are all heading for the exits at the same time. That's pushed prices down steeply, inflicting even greater losses on remaining investors, prompting them to sell too.

The result is the steep price falls we have seen over recent days in investments like gold that were widely thought to be secure harbours in times of trouble.

Alas, as we should have learned in 2008, when the financial equivalent of typhoon signal No 10 gets hoisted, such outlying havens turn out not to be very safe at all.