The melt-proof factor of safe haven assets has been proven during this recent global pandemic hysteria, a black swan event becoming a reality, which triggered the largest risk-off event for financial markets in history.
COVID-19’s impact on financial markets was real wiping $4.2 trillion off global stocks, or three year’s profits off a bull market in just three weeks. The magnitude and speed of the correction was unprecedented in the market’s history, but the coronabubble crash was not unexpected, it was correctly forecast by me, and a few other contrarian thinkers.
While the meltdown in stocks played out it also highlighted the melt-proof factor of safe haven assets in a stock market crash
Safe-haven assets did indeed live up to their name and protect and in some cases even grow capital in a market of peak fear, or bull capitation which is typified when the VIX Index exceeds 80 as it did during the 2008 financial crisis.
“While the meltdown in stocks played out it also highlighted the melt-proof factor of safe haven assets in a stock market crash”
Let’s zero in on safe haven assets, what they are, the potential pitfalls and how they can protect and grow your savings even in a financial calamity
Precious metals, particularly gold and palladium have since time immemorial weathered financial storms and have rightfully earned the status as a safe haven asset. Both precious metals have appreciated in the latest coronabubble crash. Precious metals, sometimes known as a barbaric relic of the past is a desirable asset today as it was a thousand years ago because of its ability to hold its value. Put simply, gold is inflation-proof. An ounce of gold bought a fine suite one hundred years ago and it still can today. But precious metals don’t generate income and there are storage, insurance costs for storing precious metals too. Moreover, investors have to be careful that they are not buying fake bars,
“precious metals, sometimes known as a barbaric relic of the past is a desirable asset today as it was a thousand years ago because of its ability to hold its value”
“The latest fake bars … are highly professionally done,” said Michael Mesaric, the chief executive of refinery Valcambi. He said maybe a couple of thousand have been found, but the likelihood is that there are “way, way, way more still in circulation. And it still exists, and it still works.” The world’s purest gold is found with Switzerland’s four leading gold refiners. Valcambi, PAMP, Argor-Heraeus, and Metalor – process around 2,000-2,500 tonnes of gold a year, worth around $100 billion. Their trademarks are among the most common and trusted in the industry.
Cash deposits, currencies are also on the list of safe-haven assets
Cash was king in 2018 as most stock indices yielded negative returns that year. But be careful about the currency you are hoarding because the Turkish Lira, Sri Lankan rupee, Argentina’s peso, Nigeria’s naira, and the Venezuelan Bolivar was in the words of Ray Dalio trash. Demand for stable currencies is strong in a financial crisis and there is a thriving black market for them. In the last Greek sovereign debt crisis, there was a black market premium for US dollars. Nigeria’s recent currency crisis also triggered a US dollar black market. Moreover, Argentina’s sovereign debt crisis has resulted in the return of the US dollar black market.
But you’ll also need to find out if your funds held with the bank are covered by a deposit guarantee scheme. This is when the bank pays into an insurance fund so that in the case of a bank failure, a bank run, you are guaranteed to get all or most of your deposit returned.
“If you are holding large funds US treasuries, could be your safe haven asset of choice” – Win Investing
Be mindful that bank bail-ins could become the next bank bailout in this crisis
So keep an eye on your bank’s profitability, particularly in the coming era of mortgage defaults and bad loans. In a bank bail-in, the bank uses the money of its unsecured creditors, including depositors and bondholders to sure up its liquidity. In other words, your cash deposit could be converted into worthless shares.
If you are holding large funds US treasuries, could be your safe haven asset of choice, bearing in mind that the US government can pass laws to improve its fiscal position. In the last Great Depression, gold investors were forced to sell to the government at a loss. Moreover, on the domestic front, the government can raise new taxes. For example, Congress is currently proposing a 50% tax on guns and ammunition.
“it is no surprise that demand for US treasuries is hot right now, particularly in a world of $14 trillion in negatively yielding debt and fear of a global depression” – Win Investing
On the foreign front US foreign policy centers around upholding dollar hegemony and US treasuries as a safe haven asset
Notice how the Trump administration recently referred to COVID-19 as the Chinese flu. The next step could be to force China to pay reparations for the damage done. But let’s not pussyfoot around, what if China and American went to war who would win?
But staying with the theme that US treasuries are a safe haven asset, despite the ballooning US deficit the US government is less likely to go bankrupt then say a private bank saddled with worthless loans.
So it is no surprise that demand for US treasuries is hot right now, particularly in a world of $14 trillion in negatively yielding debt and fear of a global depression. Vanguard Extended Duration Treasury ETF, an exchange-traded fund in US treasuries share price is up an impressive 19% this year.
If however, you are looking for the least amount of risk and you want to avoid the fluctuating share prices then your other option is to purchase Treasury securities with no fees or commissions.
If you don’t have a brokerage account or would rather buy Treasury bonds directly, you need to sign up and create a TreasuryDirect account.
So the melt-proof factor of safe haven assets has been proven and whether you think we are going into a risk-off or risk-on environment it is always wise to be well-schooled in what are safe haven assets.