Safe Havens and Straws in the Wind
08/02/2016 9:00 am EST
Even though stocks are now also rising strongly, we are still better off in the metals related markets and bonds. That’s where the real gains are, suggests Mary Anne and Pamela Aden, editors of The Aden Forecast.
Uncertainty breeds nervousness and fear. And that in turn drives the safe havens higher.
Gold, for example, has been the safe haven of choice for thousands of years. It’s the only international currency accepted and known throughout the world. It’s rare, safe and portable, and that’s what makes it so special.
Silver is often referred to as, “the poor man’s gold” because it’s less expensive. Nevertheless, when gold goes up, so does silver.
Government bonds are considered safe investments because there’s less chance of a country going broke than a company.
And since the US economy is the biggest in the world, and US interest rates are higher than rates in most other countries, that makes US government bonds especially attractive.
Cash and international currencies are also good safe havens. By keeping some cash reserve you’ll be ready to take advantage of good opportunities when they pop up. But in the meantime, you’ll be safe and liquid.
The reason we like the currencies is because they’ll go up as the US dollar declines. And since gold and the US dollar generally move in opposite directions, gold’s rise is going to keep downward pressure on the dollar.
The other big area of concern is what’s happening on the interest rate front. Increasingly, more interest rates are going negative. Currently, for instance, over $11 trillion in global government bonds have a negative yield. That means you pay them in order to lend them money.
Sound crazy? It is. It totally goes against all common sense and economic principles since the beginning of trade dealings thousands of years ago. Worse, this trend is gaining momentum.
This is a situation that has never happened before. In an effort to keep their economies plugging along, central banks have driven their interest rates down to unheard of levels. They’ve taken unprecedented measures and this alone makes investors nervous.
Since the bond market tends to lead the economy, these super low interest rates are flashing a warning that the global economy could stumble in the months ahead. That’s especially true considering this recovery has already lasted seven years, which is longer than normal.
You may remember that the 2008 financial crisis actually started in 2007. And in other cases, there were almost always straws in the wind before the big shock hit.
We've now had the Brexit scare, the surge in safe haven investments and record lows in the US 10-year Treasury yield. We don’t mean to scare you; rather, we want to point out that there are straws in the wind and you should be aware of them.
So does this mean a crisis is inevitable? The answer is, “No, but it could be.” The big positive is the steep rise in the stock market. Is it telling us all is well, despite these signs?
It might be and it’s definitely something to watch closely. But until then, the tug-of-war will keep pulling at the markets and we’ll have to continue letting them tell the story. So stay tuned.
By Mary Anne and Pamela Aden, Editors of The Aden Forecast