The Iran war and the global energy shock it has unleashed may have killed off the idea of a one-size-fits-all safe-haven asset.
This is not necessarily a new concept, given how poorly U.S. Treasuries fared after Russia invaded Ukraine four years ago. But the extraordinary slump in gold since the U.S.-Israeli strike on Iran on February 28 has exposed it to the light.
Treasuries, the dollar, Swiss franc and especially gold are among the assets investors tend to flock to in periods of heightened economic, geopolitical, or financial uncertainty. They are the assets most likely to serve as a store of value in a crisis.
As a non-financial asset, gold has for centuries been the safest harbor of all, particularly in an inflation storm. Yet in this crisis it has not only been the worst-performing traditional haven - it has been one of the worst-performing assets anywhere.
It has lagged high-yield credit, emerging market stocks, and even frontier market stocks. Virtually the only asset it has outperformed is the one that was inflated by an even bigger speculative bubble on the way up: silver.
Gold is down 17% so far in March, on track for its worst month since February 1983. In a month that has seen the gravest Middle East conflict and biggest global energy shock in decades, accelerating inflation pressures, and some $6 trillion of value wiped off global stocks, that’s astonishing.
But around the middle of last year gold became untethered from whatever economic fundamentals underpinned it. Central bank demand cooled and retail investors, momentum traders and machines chased it higher, culminating in a high of $5,595 an ounce in January. That “fear of missing out” (FOMO) euphoria quickly flipped to widespread liquidation, drowning out any “FTQ” or flight-to-quality demand sparked by the crisis.
PLENTY OF REASONS TO SELL, FEW TO BUY
If gold’s safe-haven allure has been muddied, the dollar and U.S. Treasuries have hardly shone either.
The dollar has risen, but by less than 2%. Several major central banks are likely to tighten policy this year more than the Federal Reserve, so the dollar isn’t getting any support from expected rate differentials.
As analysts at Deutsche Bank also note, many central banks in Asia and the Middle East may look to run down FX reserves and excess dollar savings to finance their higher import bills, prevent their currencies from weakening too much, and cushion the incoming inflation shock.
This will cap the dollar and potentially be an even heavier drag on U.S. Treasuries. There are signs this may already have begun - the amount of Treasuries held at the New York Fed on behalf of global central banks has slumped by around $75 billion in the last four weeks.
Deutsche Bank analysts estimate this equates to around $60 billion of selling by the foreign official sector, its largest net sales since the COVID-19 pandemic and second largest on record. The Treasuries market may be the most liquid in the world, but it’s no longer automatically seen as the safest place to be.
Meanwhile, the Swiss franc and Japanese yen - the two safe-haven currencies that traditionally boast current-account surpluses and low inflation - are blighted by domestic issues.
The Swiss National Bank has warned that, in the face of currency appreciation, its “willingness to intervene in the foreign exchange market has increased.” The yen, already hovering around multi-decade lows, isn’t holding much appeal given that Japan imports almost all of its energy.
The current turmoil shows that investors need to be more nimble, flexible, and creative. Trading strategies may be preferable to simply buying traditional safe-haven assets, and the response to each crisis will depend on its genesis, such as buying energy stocks in an energy crisis or buying defense stocks in a time of conflict.
There is one asset, however, that always seems to do well in a crisis, even an inflationary supply shock: cash. U.S. money market funds have grown by around $60 billion since February 28 to a new record of $7.86 trillion. Don’t bet against that total topping $8 trillion in the coming weeks.