Shell-shocked investors flee to safe havens

By: Alexander Osipovich
Agence France-Presse

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NEW YORK—Fears of a new recession have wiped trillions of dollars in value from global stock markets in recent weeks and sent investors scurrying to assets they view as less risky.

But are “safe havens” like gold really safe? Here are several of the refuges where panicky investors have been shifting their portfolios amid the market turmoil, and the pluses and minuses of each:

GOLD: The price of gold, a time-honored store of value, skyrocketed to a new record of $1,878.15 per ounce on Friday, and some analysts say it could go above $2,500 this year.

The World Gold Council, an industry body, predicts that strong demand in India and China will continue to prop up the gold market this year.

“A developed world with slower growth, a large fiscal deficit and near zero rates over the next few years, inflationary pressures in emerging economies, and larger political and economic uncertainty bodes well for history’s oldest form of wealth,” Barclays Capital said.

Skeptics argue that gold has little inherent value and is vulnerable to sudden drops in price. In the two decades before 2003, its price was essentially flat, mostly hovering between $300 and $400 per ounce.

U.S. TREASURIES: US government debt has long been seen as “risk-free,” and paradoxically this has remained the case even after Standard & Poor’s downgraded the United States this month.

Prices have surged in recent weeks, as spooked investors bought Treasury debt on which yields had fallen virtually to zero percent, or a loss if measured against inflation.

The 10-year bond dropped to a record low of 1.974 percent on Thursday, before pushing back just above the 2.0 percent line.

“It wouldn’t shock us to see another quick sharp move and then staying under two percent especially if the eurozone issues worsen,” said George Goncalves, head of US rates strategy at Nomura.

But he cautioned that the bond rally might lose steam: “We believe that the majority of bond market gains are behind us,” Goncalves said.

SWISS FRANCS: Switzerland’s currency has proved a popular safe haven for those who fear their dollars or euros will fall due to stagnant growth or possibly inflation.

Over the past year, the Swiss franc has gained more than 30 percent against the dollar and over 16 percent against the euro.

However, this month Switzerland’s central bank began intervening to halt the rise of the currency, tarnishing its appeal as a safe haven.

JAPANESE YEN: Japan’s currency hit a post-World War II record of 75.95 yen against the dollar on Friday, even though Japan has vowed to contain the rise of the yen to protect its vital export sector.

“There is no reason that the yen should be regarded as a flight-to-safety currency,” Takehiko Nakao, Japan’s vice finance minister for international affairs, told Dow Jones Newswires on Friday.

THE VIX: When markets are fearful, one of the best investments may be to buy fear itself – contracts tied to the Chicago Board Options Exchange Market Volatility Index, better known as the VIX.

Often called the “fear gauge,” the VIX is a measure of the volatility of the S&P 500 stock market index and tends to spike when investors think a crash is imminent. It jumped 35 percent during Thursday’s big sell-off.

Not a safe haven in the traditional sense, sophisticated investors use VIX derivative contracts to protect themselves from volatility.

Trading in VIX-related contracts “exploded in volume” in the past two weeks, said Adam Warner, an options analyst with Schaeffer’s Investment Research.

US FARMLAND: Some say the most reliable way to hedge against catastrophe can be to buy US farmland, which has surged in value this year as food prices have soared and bad weather has tightened the global food supply.

The value of farm acreage in the five US midwest farm states grew 17 percent in the second quarter of 2011, its largest year-on-year increase since the 1970s, according to the Federal Reserve Bank of Chicago.

“Since the financial crisis, we’ve seen investor interest rise every year,” Stephen Johnston, chief investment officer for Agcapita, a Canadian farmland investment fund, told AFP.

Philippines to continue buying US treasuries

Debt paper still investment grade, highly liquid

By: Michelle V. Remo
Philippine Daily Inquirer

STILL INVESTMENT GRADE The facade of the US Treasury Department is seen on August 5, 2011, after Standard & Poor's cut the US credit rating from its top-flight triple-A one notch to AA+, and added a negative outlook to it. In reaction to the credit downgrade, the Bangko Sentral ng Pilipinas said a Double-A-plus rating was still investment grade and US treasuries remained to be instruments that the Philippines could invest in. AFP Photo/NICHOLAS KAMM

The Philippines will keep its holdings of US treasuries, which make up the bulk of the country’s foreign exchange reserves, even with the downgrading of the Triple-A credit rating of the United States.

In reaction to the credit downgrade by ratings firm Standard & Poor’s, the Bangko Sentral ng Pilipinas said a Double-A-plus rating was still investment grade and US treasuries remained to be instruments that the Philippines could invest in.

The BSP puts the bulk of its $69 billion worth of foreign exchange reserves in US treasuries. Under the investment guidelines of the BSP, the foreign exchange reserves should be invested only in investment grade and highly liquid instruments.

“For the BSP, US treasuries will continue to be within the allowable investible universe for our reserves even with the one-notch downgrade by S&P,” BSP Governor Amando Tetangco Jr. told reporters.

Tetangco said that even with the US credit downgrade, holding on to US treasuries remained prudent since these instruments were still the most liquid and since the value of European assets have been put at risk by the debt woes in the euro zone.

“Because the US market remains the most liquid and deepest and as Europe still faces uncertainty, the US market is not likely going to experience a huge selloff even with the one-notch downgrade. Many still see the US treasury market as a safe haven,” Tetangco said.

Still, the BSP chief said the country has over the years been diversifying its foreign exchange reserves. A small portion of the reserves is invested in other foreign, liquid assets.

“Dips in the value of US treasuries would be compensated for by earlier diversification moves,” Tetangco said.

But although the BSP is poised to continue holding on to US treasuries, Tetangco said it was prudent to pursue actions that would help shield the Philippines from uncertainties in the global economy that might result from the US credit downgrade.

Economists believed that the downgrade of the US credit rating could dampen the outlook on the performance of the global economy and thus drag the overall investment appetite of investors.

Tetangco said the Philippine government’s goal of gradually reducing its budget deficit should help keep confidence of foreign investors in the country’s sovereign bonds.

“It would be good to heed calls for improvements of fiscal management. The call by President Aquino to keep our fiscal house in order is most opportune,” Tetangco said.

Meantime, although the BSP is poised to hold on to US treasuries, Finance Secretary Cesar Purisima said it would be wise to start considering further diversification of the foreign exchange reserves of the Philippines. Purisima added that the same proposal should be considered by policymakers of other countries.

“This development [downgrade of the US credit rating] highlights the need for alternative global reserve currencies and benchmarks that are more stable and as liquid and convertible,” Purisima, who sits in the Monetary Board of the BSP, said in a statement.