Safe Havens That Replace Gold and Bonds

05/11/2012 6:00 am EST

Focus: FOREX

Andy Waldock

Founder, Commodity & Derivative Advisors

Fallout from European elections has sparked a serious flight to safety, writes Andy Waldock, and gold and bonds are old news, but three assets can still be trusted to provide above-par returns in these uncertain times.

Far too many market events transpired this week to focus on any single one. The general consensus of the week’s events can be summed up as deflationary. Unfortunately, this bodes poorly for global economies and unravels the tenuous global grasp on a Greek default and European Union unrest.

We’ll now take a brief look at the Greek and French elections and their effect on deflation and social unrest, and finish with three places to invest that should beat negative-yield Treasuries and deflationary assets.

Francois Hollande of the Socialist party was elected as the next French President. He was widely expected to win, and yet the realities of his policy intentions are just beginning to sink in. France has been the peacemaker in the European Union’s economic crisis between the austere and fiscally solvent Germans and the spendthrift southern European nations like Spain and Portugal.

France is far from altruistic in their pursuit of bailout money. The fact is France is already at 85% debt-to-GDP and its balance of trade has been negative for eight years. President elect Hollande understands that his nation is next and wants to ensure a bailout path for his own people.

France is the tenth-largest global economy and is too big to bail out economically and too entrenched in their ways to elicit any sympathy from the hardworking Germans. President elect Hollande won the election on the basis of remaining French, which means increasing government expenditures. He is in favor of retaining the 35-hour work week, returning the retirement age to 60, and adding 60,000 government-paid teachers. His Keynesian approach to the economy will not fly with the austere Germans.

Meanwhile, the Greek elections have led to complete rejection of austerity and economic reforms by its election of two primary winners from parties that have been peripheral ones for the last 40 years. Imagine a runoff in the US between Ron Paul and Ralph Nader and you’ll get an idea for how strongly the Greek people have rebelled against the two mainstream parties that have been the negotiators of their bailouts.

The Greek people have thoroughly rejected the bailout parties, leaving German Chancellor Angela Merkel to reiterate her position that Greece must make its budget targets or Germany will not allow the next bailout of 30 billion euro to flow through in the next quarter. The Greek people would rather be broke and miserable by their own choice rather than broke and miserable under someone else’s thumb. Some estimate that there is now as much as a 75% chance that Greece will leave the Eurozone in the next 12 months.

The effect of the French and Greek elections has caused the US equity markets to stumble and US Treasury yields to hit historic lows. Currently, only the 30-year Treasury bond offers a real rate of return above zero. Those moves have behaved in their normal relationship: uncertain equity money moves to the safe haven of Treasuries.

However, the behavior of other safe-haven investments suggests much deeper economic concerns. Gold has begun to lose its status as a safe-haven investment, as it has declined more than 4% since the election results. We’ve also seen the currencies of commodity-based countries fall relative to the US dollar. Previously, these declines have been buying opportunities, as the liquidity that has been pumped into the global economy has been viewed as commodity inflationary.

This brings us to three places where money can be placed and be expected to hold its own and then some. First of all, the US dollar is going to benefit as the safe haven for the tremendous amounts of cash that get pulled from foreign equity and bond markets as the result of a disorderly Grecian default and an unraveling commitment to German austerity measures.

Secondly, as people decide what to do with their money, foreign-denominated CD’s will become more favorable. For example, aussie dollar CD’s can yield better than 2.5%, and Australia is one of the few countries that are both economically developed and debt free.

Finally, there are still some supply and demand relationships in sugar, soybeans, and platinum that should hold true without too much correlation to the global economic disaster. After all, economic depression has to be pretty serious before people stop putting syrup on their pancakes.

By Andy Waldock of Commodity & Derivative Advisors

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