Havens Fade: Inflation Challenges Bonds & FX, Gold Rises as Hedge

Key Takeaway

• Traditional safe havens like US Treasuries, the Swiss franc, and the Japanese yen are failing as inflation disrupts old market correlations.
• The dollar remains a relative haven, rising in 13 out of 18 quarters when the S&P 500 fell since 2008.
• Investors advised to diversify with gold and commodities as traditional 60/40 equity/bond portfolios lose their hedge effectiveness.

Rethinking Safe Havens

The traditional financial wisdom that bonds and certain currencies act as safe havens during stock market downturns is being challenged. The global pandemic has accelerated a shift in the relationship between asset classes, with US Treasuries, the Swiss franc, and the Japanese yen losing their luster as reliable protectors against losses. Brent Donnelly, president of Spectra FX Solutions LLC, notes the difficulty in finding effective safe havens amid rising inflation, suggesting that "the best hedge right now is cash." This sentiment is echoed by Jon Adams, chief investment officer for Calamos Wealth Management, who points out that fixed income no longer offers the portfolio protection it once did, as asset classes become more correlated.

Yield and Currency Dynamics

The divergence in interest rates between the US and countries like Japan and Switzerland has widened, affecting the haven status of the yen and the franc. Central bank interventions, particularly by the Swiss National Bank, have further complicated the appeal of these currencies as safe havens. Meanwhile, the US dollar has maintained its role as a haven, appreciating in most quarters when the S&P 500 fell since 2008. However, concerns over US fiscal deficits and government borrowing could undermine the dollar's strength in the long term.

Gold's Ascendancy

Amidst the shifting landscape of safe havens, gold has emerged as a more reliable hedge against market volatility and inflation. Bob Elliott, CEO and chief investment officer at Unlimited Funds Inc., recommends diversifying traditional 60/40 portfolios with allocations to gold and other commodities. Gold's performance, particularly its 12% surge this year, underscores its role as a contemporary fear gauge and a hedge against asset volatility. Central bank purchases and geopolitical tensions have bolstered gold's appeal, challenging its traditional haven status but confirming its place in modern investment strategies.

Street Views

• Brent Donnelly, Spectra FX Solutions LLC (Neutral on safe havens):

  "There are just not many good, liquid safe havens in a time of rising inflation. Bonds don’t work, yen and franc don’t work. So if you are worried about a lower stock market, the best hedge right now is cash."

• Jon Adams, Calamos Wealth Management (Neutral on fixed income as a safe haven):

  "Investors have been rethinking about what they considered as safe-haven assets. Fixed income is not protecting your portfolio the same way as before since different asset classes are getting more correlated."

• Bob Elliott, Unlimited Funds Inc. (Bullish on gold and commodities):

  "Traditional 60/40 portfolios need to be tweaked... To diversify and hedge as havens disappear, he recommends allocating 10% to gold and another another 10% to other commodities... a lot of them can get a bigger bang on the buck without incurring more risk by adding gold."