Market volatility is never fun, but before the 2008 crisis if investors couldn't stand the heat, at least there was a way out of the kitchen: They could shift to the safe haven asset classes of government bonds, gold or cash. Returns were lower, investors may not have had the same protection against inflation, but they could be comfortable that their cash was safe. The credit crisis has rewritten the rules. 'Safe havens' have seen too much cash and many now look very expensive. This Reuters piece outlines the dilemma.
The question on 'safe havens' is most pertinent in the case of developed market government bonds. Another Reuters piece neatly outlines the problems in these markets. A combination of weak economic growth, market volatility and quantitative easing has pushed gilt yields down to record lows at the same time as borrowing levels have hit new highs. Investors are therefore getting a lower income, backed by weaker quality government finances. Equally, the debt debacle in the US raised the spectre of default. It remains possible that government bonds will start to price in some credit risk in the US and UK as they have done in parts of the Eurozone.
Cash should be the ultimate safe haven asset. It may not be possible to make much money in a bank account and it won't protect your purchasing power, but surely capital will be preserved? As this article from the Mail in May demonstrates, the rating agencies do not agree that UK banks are safe. There is certainly enough controversy to make people think twice before depositing any cash over and above the compensation scheme limits.
Similar problems dog the money market sector as this piece outlines And even some National Savings and Investments have now gone the way of the dodo as Mindful Money has covered in the past.
The outlook for gold has been hotly debated. But, at the time of writing, it has sold off over 10% in a week . This is hardly most people's idea of a 'safe haven'. Equally, the Swiss franc - the other great alternative to the US Dollar and gold - proved vulnerable to the machinations of politicians as the Swiss Government lowered rates to weaken the currency.
The blogosphere is alive with theories as to the true 'safe haven assets'. Many have focused on physical assets.…
