Not Safe Havens

Nicole Elliott from Mizuho made an interesting comment on CNBC Europe yesterday: Anything that can go down 10% in one week cannot be considered a safe haven…of course I am talking about the Swiss franc and gold.

Both the franc and gold each had big drops (at different times) in August. Not putting too much in these things has been a major point here over the years and these week-long dips serve as microcosms for what can happen. Gold might be working its way back up to $1900, it certainly has bounced and for now the franc is still headed lower but at a flatter trajectory.

The problem with gold in this context is that it is very volatile. Some advise putting 20% in gold which I have never understood because of the potential volatility. I think gold works because it usually has a low correlation to equities. From 1980 to about 2001 it mostly went down as equities went up (low correlation) and since 2001 it has gone up a lot as equities have drifted lower (again low correlation).

Two big issues with the Swiss franc is that it is a very small currency and the run up from early this summer was evident of a buying panic. The currency is small enough that the SNB has tried several times to intervene in the currency market. It did not succeed but it obviously thought it could. Another issue, more of threat that might be on the back burner for now is that the banks are much bigger than the country in a similar vein as Iceland.

A recurring theme here, and it is still valid, is that these sorts of perceived safe haven exposures have fundamental risks and are subject to volatility same as most other holdings in a diversified portfolio. The better way to hide would be small allocations several types of perceived safe havens that hopefully have a relatively low correlation to each other.

7 Comments

  1. Not sure I’m following your logic on this…since 2000 the annual returns on the S&P 500 have been about 50% more volatile than the annual returns on gold. If volatility is such a concern, you’d be better off investing in gold than stocks.

    2000 – 2010 S&P 500 Std. Deviation = 20.5%

    2000 – 2010 Gold Std. Deviation = 12.8%

    Reply
  2. That’s why I like Cuggino’s (five star) Permanent Portfolio Fund. He has SF and Gold, but counterbalances with other investments effectively (such as long TBills, etc.)

    Actually, I like the ETF permanent portfolio I cobbled a while ago, as it does not have the 15-20% in cash Cuggino maintains. This effort actually has performed better (shameless self promotion).

    T

    Reply
  3. I believe Permanent Portfolio has 20-25% in gold, and the fund itself I think has been much less volatile then either the volatility of stocks or gold viewed in isolation.

    Anonymous, assuming your numbers are correct, I think that is telling in that stock volatility is still perceived as “normal” in the context of a portfolio while gold volatility or other alternative type investment volatility is not even if the absolute numbers are lower.

    I think that actually has sentiment implications in that it suggests that stocks are still seen as the “default” investment choice for long-term portfolios. I don’t think this secular bull in gold tops out until the clear institutional bias shifts from stocks to gold (which from a contrarian perspective means stocks will be the better long-term buy).

    Reply
  4. Roger:
    When looking at correlations you can have a positive correlation, a negative correlation, or a low correlation. You have described a negative correlation, but referenced a low correlation. Could you clarify this for me?

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  5. sorry for the lack of clarity. the correlation between gold and US equities is dynamic. at times it is negative, at times it is merely low and at other times not that low. if you look at various longer periods of time gold generally does not look like equities.

    Reply
  6. There is enormous infatuation with the Permanent Portfolio. Not unusual as its climb has been incredibly impressive and steady over the last decade.
    I cannot but wonder, however, if that isn’t a result of being in the right place at the right time. Gold has risen fantastically (and also steadily) during that period. With its outsized allocation to PMs, I can’t help but wonder whether this has been the perfect situation for this particular allocation.
    Personally, I have far more in PMs than the fund, and have held such a heavy stake for 8-9 years. But I don’t think for a moment that this party (and the LT cycle) will not end. Once that happens, this fund’s heavy allotment to PMs may by a massive drag, no matter how well its other components may do.

    Reply
  7. “The problem with gold in this context is that it is very volatile. Some advise putting 20% in gold which I have never understood because of the potential volatility” Roger I think most financial advisors think that gold is more volatile than facts support.
    Could you please tell us about other investments themes that you could invest 3% of your portfolio in that have low correlation to the market?
    Certainly Gold will be in a bubble one day, and we will all know about it retrospectively, but currently even central banks have been increasing their holdings and we are far from bubble.
    Thanks for your wonderful blog.
    Mark

    Reply

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Not Safe Havens

Nicole Elliott from Mizuho made an interesting comment on CNBC Europe yesterday: Anything that can go down 10% in one week cannot be considered a safe haven…of course I am talking about the Swiss franc and gold.

Both the franc and gold each had big drops (at different times) in August. Not putting too much in these things has been a major point here over the years and these week-long dips serve as microcosms for what can happen. Gold might be working its way back up to $1900, it certainly has bounced and for now the franc is still headed lower but at a flatter trajectory.

The problem with gold in this context is that it is very volatile. Some advise putting 20% in gold which I have never understood because of the potential volatility. I think gold works because it usually has a low correlation to equities. From 1980 to about 2001 it mostly went down as equities went up (low correlation) and since 2001 it has gone up a lot as equities have drifted lower (again low correlation).

Two big issues with the Swiss franc is that it is a very small currency and the run up from early this summer was evident of a buying panic. The currency is small enough that the SNB has tried several times to intervene in the currency market. It did not succeed but it obviously thought it could. Another issue, more of threat that might be on the back burner for now is that the banks are much bigger than the country in a similar vein as Iceland.

A recurring theme here, and it is still valid, is that these sorts of perceived safe haven exposures have fundamental risks and are subject to volatility same as most other holdings in a diversified portfolio. The better way to hide would be small allocations several types of perceived safe havens that hopefully have a relatively low correlation to each other.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing