The Safe Haven Problem

by Shaun Richards

At a time of crisis people look for what are considered to be safe havens. I say considered to be because this subject has been a regular feature on here in the credit crunch era and we have observed some ch-ch-changes in behaviour. For example we have seen investors be willing to take a loss by buying bonds with a negative yield suggesting that fear of losses elsewhere may be so high that a small one is preferable. Or that you expect to gain so much from that particular currency ( Euro, Swiss Franc or Yen) that the yield loss is minor.


This is a traditional if not the traditional safe haven and in a reversal of the trend above one of the costs of holding it has fallen substantially recently. If we look at it in terms of the world’s main currency the US Dollar the interest-rate cost has fallen to nearly 0%. The effective Federal Funds rate if 0.05%. Of course some currencies via negative interest-rates have for this area meant that you get a small annual gain from holding Gold although of course there are other costs.

That leaves gold, the traditional safe haven, whose supply is largely fixed, with annual production a modest proportion of the infinitely durable stock. Gold production in 2019 fell slightly to 3,464 metric tonnes, the first fall in 10 years according to the World Gold Council, as ore grades in the world’s major mines declined and mining costs rose. The year’s higher prices increased recycling, so total supply increased, but only modestly, by 2%.

That was from Reuters Breaking Views at the end of March and leaves us with a view of something with a fixed supply. There is a shuffle there from a fixed stock which does not get a mention although maybe the supply could change.

A major and prolonged price rise would increase production, but with mines having a high capital cost and a four or five year lead time, this would not happen quickly. Ultra-low interest rates, yet more global liquidity and fewer opportunities elsewhere should thus lead to a surge in investment demand and prices. Already, the price of Comex near-term futures has risen one-quarter in a year, to around $1,620 an ounce. The equivalent in today’s dollars of the January 1980 peak, though, is $2,826. There is further to go.

There has been a change since because as I type this the price of the June future is US $1770 per ounce. According to there is a fair bit going on.

On the New York commodity market, gold has risen 17% since the beginning of the year, 10% less than the record set in 2011. During today’s trading, gold futures reached a price of 1,785 USD per ounce, its high level since October 2012.

When I looked at this before I noted some problems in the market so let me point out that between the June future and spot gold there is a gap of US $47. So taking that forwards would mean in simple terms a price some US $282 higher over a year or 16% which seems rather rich to me. There are costs to holding it such as storage and security but are they really that high?

For newer readers these are numbers I used to calculate for a living although not usually Gold. The reason why I have looked at a near month ( June) is that it is the most liquid one because as you go further out in time markets get less liquid and sometimes completely illiquid. But as you can see something looks wrong and in fact we are where we should not be.

The basis cannot theoretically exceed the carrying charge (the lion’s share of which is interest, usually calculated on the basis of LIBOR). If it did, speculators would be able to pocket risk-free profits in buying the cash gold and selling the futures contract against it. This arbitrage would quickly push the basis back to the level of carrying charge. ( Gold Standards Institute in 2012)

Oh Well! As Fleetwood Mac would say. We do have two of our buzzwords in play as I note this from the LBMA.

Gold Market “Resilient”

Gold’s Q1 2020 price rise included a brief period of exceptional volatility. In the eight trading days 6th – 17th March, the gold price fell 12.7% from a high of $1,687.00 per oz to a low of $1,472.35 oz before resuming its steady upward trend. “The gold market continues to be resilient….”

Ah resilient and of course the problems with getting hold of physical Gold were supposed to be temporary! As Lyndsey Buckingham would say.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

Swiss Franc

This is an issue that has persisted throughout the credit crunch era and if you are unfamiliar you might like to look at my articles on the Currency Twins and the Carry Trade. The Swiss National Bank has tried to punish those looking to buy the Swiss Franc via negative interest-rates ( presently -0.75%) and through what it called for a while “unlimited” foreign-exchange intervention. It had to abandon the latter in January 2020 due to.

Pressure pushing down on me
Pressing down on you, no man ask for
Under pressure that burns a building down
Splits a family in two
Puts people on streets ( Queen)

Well like The Terminator it is back as I noted this morning as the sight deposits in Switzerland rose.

Swiss Domestic Sight Deposits (CHF) Apr 10: 552.0B (prev 535.6B) Swiss Total Sight Deposits (CHF) Apr 10: 634.1B (prev 627.2B) ( @LiveSquawk )

For those unaware it is a proxy for the intervention undertaken and as you can see the SNB has been trying to put a lid on the Swissy. It is at a significant level because at 1.0545 versus the Euro it is pretty much where it went after the “unlimited” intervention pledge was abandoned and the Swiss Franc soared.

Regular readers will note that I previously referred to the SNB trying to do this with the Swissy at 1.06.

Hold the line, love isn’t always on time, oh oh oh
Hold the line, love isn’t always on time, oh oh oh ( Toto)

So in spite of a -0.75% interest-rate and intervention demand for the Swiss Franc continues.


There are some sub-plots to today’s story. For example with equity markets where they are now really there should be little or no demand for safe haven investments. After all the US S&P 500 index future has risen from 2220 to 2788 which is quite a bounce. Yet as we have noted it seems to be like a Pantomime with investors continuing to shout “Behind You.”

There are other safe havens I have not mentioned. At the moment the Japanese Yen is not in play because it is to some extent a Japanese issue. What I mean by that is rallies involve fear of the Japanese repatriating some or all of their large foreign investments and hence large Yen demand. Investors front-run the expected demand and the party starts. It also seems that the Carry Trade reversals in the Euro have stopped so it has faded from view. We also have something of an anti safe haven in the UK Pound £ which has been having a good run as the situation in equity markets has calmed down.

Next comes sovereign bonds which are now one of the most complex safe haven issues of all. Where is the safe haven in a negative yield as so many place have? After all we now live in a world where even US Treasury Bills have seen a negative yield. As to bonds we have a real ying and yang in play. Firstly we expect an enormous amount of bond issuance to pay for all the government spending. But then you may be able to sell to that nice central banker who keeps buying them and breaking the price discovery chain.

And if you don’t love me now
You will never love me again
I can still hear you saying
You would never break the chain (Never break the chain) ( Fleetwood Mac )


Loads of questions arrived this week so I did a second one yesterday. Also I am now on Spotify after various requests to do so.