As an investor, you’d have to be an incredible optimist to think the world hadn’t changed for the worse since the beginning of the year.
Oil prices have plumbed new lows, markets in the US and abroad have remained volatile, terrorist threats have major cities on edge, and the Swiss National Bank’s (SNB) decision to remove the franc’s 120 currency peg with the euro have roiled the entire global financial system.
In 2011, with the Euro Zone undergoing a financial meltdown, the SNB opted to create the currency peg to prevent the Swiss franc from being overvalued against the euro. Such an appreciation would have made its products much more expensive in its primary export market, the Euro Zone. In 2014, the franc trended lower with the euro, serving to inflate the SNB’s balance sheet and setting the stage for the dramatic change of monetary policy last week.
Anyone who thought banks were paragons of virtue (I’m not one of them) no doubt had a change of heart after the sudden policy shift which at one point saw the franc up 41% against the euro and 20% against the US dollar.
During the Swiss gold referendum – the build up and final outcome of which hammered gold prices lower- SNB officials were telling their fellow citizens there would be no change in policy concerning the euro peg for years to come. However, the threat by the European Central Bank to adopt a U.S- style program of quantitative easing, which would have depressed the euro even further, panicked the bank into reversing its currency peg policy.
No longer a safe haven given the SNB’s policy of negative interest rates – it shouldn’t come as a surprise that a lot of smart money is heading into gold. At the same time, fresh fears of a Greek exit from the Euro Zone or a considerable shake-up in the status quo within its member group, have driven safe-haven demand into gold.
Looking at last week’s future’s market, gold recorded its largest weekly gain in 18 months as investors sought safe haven from the unprecedented volatility in European currency markets. Assets in the SPDR fund, which counts billionaire John Paulson as its biggest holder, jumped 1.9% to 730.89 metric tons on Jan. 16th, the biggest gain since May 25, 2010. This week the holdings climbed 3.3 percent.
Gold has exploded in a number of major currencies including the Euro, Japanese Yen and Canadian dollar which to some analysts is a bullish sign. Gold holders in these regions have managed to retain their purchasing power for the wealth that they invested in physical gold. The recent trend in currency devaluation worldwide can only create more demand for gold as a currency hedge, analysts contend.