Should Investors Reconsider Cash and Gold as Safe-Havens?

The staggering global debt crisis continues to linger on in the financial markets, as a country as small as Greece is unable to successfully deal with its debt addiction.  Greece is certainly not alone in this mess, which has investors worldwide seeking out safe-haven instruments such as cash and precious metals.  However, as markets and regulations change, investors are forced to rethink their safe-haven choices.  Cash is considered to be king, but how well is this notion holding up in today’s market?

The U.S. dollar is often considered to be the prized safe-haven instrument of choice, and is officially the world’s reserve currency.  Currently, investors are also able to earn interest on dollars by investing in U.S. Treasury obligations, but this is being debated.  Earlier this week, I discussed how the Treasury is considering permitting negative interest rate bids in auctions for Treasury bills.  In a recent closed meeting, dealers and Treasury officials discussed selling T-bills above par value.  This is an important development because it offers one less incentive to choose dollars as a safe-haven over gold.  Critics of gold are quick to point out that the yellow metal does not offer a yield, but the dollar could soon lose this advantage, without even considering the affects of inflation.  Gold’s value can not be printed away and devalued like the dollar.

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The liquidity advantage of dollars in the money-market fund industry may also be dethroned.  After more than three years since the collapse of Lehman Brothers, the Securities and Exchange Commission finally intends to unveil a plan to provide confidence to the $2.7 trillion industry.  When Lehman collapsed, a money-market fund called Reserve Primary, which held Lehman debt, broke the buck by falling under the $1 per share value.  A money-market fund breaking the buck is extremely rare.  This decline caused investors to panic and withdraw their dollars at a rapid pace.  The new SEC regulations aim to prevent another bank run scenario by not allowing investors to withdraw all of their money.  The WSJ explains, “Investors who wish to sell all of their holdings at once would be able to get only about 95 percent of their money back immediately, with the remaining 5 percent returned to them after 30 days.”  In a world where countries like Greece could default (again) any day, investors having to wait a month to receive all their money is not likely to provide reassurance.

Although the money-market fund industry is opposed to the idea, the SEC plans on eliminating the fixed $1 per share value of money-market funds, and make it float-able like other mutual funds.  This move would also hurt investors as they would be exposed to more volatility.  In order to provide a larger capital cushion to money-market funds, investors may even have to cough up more fund fees.  Returns on funds are already  suffering due to the Federal Reserve’s zero interest rate policy, and more fees could provide another incentive to avoid holding a fading asset. “The generosity of giving you the choice of which way to die is really not much of a choice,” said Mr. Donahue of Federated.

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Low or negative interest rates, liquidity controls and increasing fund fees are a growing problem for investors that hold dollars as a safe-haven asset.  When inflation and quantitative easing programs are factored in, negative real interest rates become a much larger problem for investors.  Instead of considering gold a barbarous relic, investors should embrace it as a time-tested method to preserve wealth.  A new report from Credit Suisse and the London Business School shows that gold serves as an excellent inflation hedge.  The report explains that over the past 112 years, “gold is the only asset that does not have its real value reduced by inflation.  It has a potential role in the portfolio of a risk-averse investor concerned about inflation.”  Even in periods of deflation, represented by a contraction greater than 3.5 percent, the real return on gold averaged 12.2 percent.

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To contact the reporter on this story: Eric McWhinnie at

To contact the editor responsible for this story: Damien Hoffman at