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Published on Gold Anti-Trust Action Committee (http://www.gata.org)

Wall Street Journal gives gold only resentful acknowledgement as safe haven

By cpowell
Created 2010-08-25 02:37

As Dollar Slides, Safe-Haven Options Shrink

By Michael Casey
The Wall Street Journal
Tuesday, August 24, 2010

http://online.wsj.com/article/SB1000142405274870344700457544987105299895... [1]

What's a bear to do?

Most of the time since the 2008 financial crisis, the dollar has fulfilled its traditional haven role, rallying on bad news, falling on good. Except when things are really, really bad, as with Tuesday's record 27.2% plunge in existing U.S. home sales for July, which sent the dollar lower against the euro and the yen.

So what should be the safe haven? At a time like this, when half the world is mired in near-zero growth and when the strongest growth economy, China, uses a non-convertible, dollar-pegged currency, perhaps there is no safe haven.

In the hours before the woeful housing data, the dollar was rallying against the euro as investors turned gloomy. One of their fears was that the home sales number could be weak.

... Dispatch continues below ...



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But when it came in far weaker than anyone expected it offered a bitter reminder that the moribund U.S. economy, far from being an island of stability, is the central contributor to the global economy's malaise. The data raised the prospects of even more expansive "quantitative easing" monetary policy from the Federal Reserve, which would make the dollar yield even less than the euro.

But the euro as a safe haven? Despite strong growth in Germany, concerns about the fragility of European banks and the challenges confronting indebted nations like Spain and Greece are sustaining nagging doubts about the viability of European monetary union.

So it's not surprising that buyers flocked to the Japanese yen, a low-yielding funding currency that attracts capital inflows when people unwind risky positions elsewhere. But the yen is at a 15-year high against the dollar, which not only provokes talk that the Japanese authorities may intervene to tame their rallying currency, but also makes it look pricey. After all, it belongs to an economy that is byword for economic failure, a place trapped in a deflationary spiral, with government debt over 200% of gross domestic product and yields lower than U.S. Treasurys.

The Swiss franc is a more worthy haven, a role it occupies in Europe. But with the Swiss economy worth a tenth of Japan's, it's too small to sustain big inflows.

The Australian dollar is another option because the Reserve Bank of Australia's 4.5% cash rate is higher than most and because the country's mining exports give it exposure to China. But Aussie dollar liquidity is also comparatively thin, an unresolved weekend election has left a cloud over the political outlook, and if China were to slowdown, Australia would take a hit. That's precisely the kind of risk investors want to avoid when seeking a safe haven.

So many risk-averse investors are shunning currencies and turning to an old favorite: gold. Yet, rationally, that's an especially odd choice. Gold is traditionally an inflation hedge, not a deflation hedge. The market for the metal itself is very illiquid, although the development of exchange-traded funds has opened up a good proxy. And of course gold doesn't earn any income.

Nonetheless, with investors losing confidence in the governments that back currencies, many are showing preference for this shiny yellow metal of little industrial value simply because of its centuries-old reputation as a store of value that outlasts politics.

The attraction to gold "is in people's DNA," says David Gilmore, a partner at Essex, Conn.-based Foreign Exchange Analytics. He adds that its zero return doesn't look so bad when short-end interest rates on the three major currencies are all lower than inflation.

Yet Mr. Gilmore also points out an obvious disadvantage to gold: at just $30 shy of the near-term-contract's $1,260-per-ounce record, further gains could be limited.

At $71 a barrel, oil is cheaper. And who can doubt that there are years of growing Asian demand in its future? But right now oil is suffering from the global slowdown and oversupplies of fuel. In short, it's a risky asset, not a safe haven.

So if there is no good safe haven, maybe it's time to take some risks.

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Source URL:
http://www.gata.org/node/8956