How safe is the safe haven trade?

By David Nelson, CFA

Stocks ended the shortened holiday week close to the flat line while bonds and gold finished under pressure as investors rotated out of traditional safe haven assets. U.S. yields pushed higher on the heels of a better than expected jobs report coming in at 222k above consensus at 185k.

U.S. 10 Year Yield 5 Year Chart

German 10 year yields also rose holding onto their post-election breakout last November. Even Japanese 10 year yields in a nearly 2 decade slump, are threatening to break the downtrend line.

German 10 Year Yield 5 Year Chart

Will Japan be next?

However, of more concern for asset allocators is Gold (GLD), the ultimate safe haven trade. This is the asset that’s supposed to protect us from all adversaries i.e. inflation, geo-political turmoil, even a nuclear event.

Early in the year the yellow metal put in a bottom and certainly on a short term basis Gold Bugs could rejoice. After the lows late December (GLD) shot up a quick 25% and even after a rough couple of weeks is still up close to 15% for 2017.


Despite its year to date strength, I find the breakdown last week concerning as it comes in the face of Dollar (DXY) weakness where there is a strong inverse correlation. Gold’s selloff post the election was textbook as the U.S. Dollar climbed higher on hopes of the Trump agenda igniting the reflation trade.

The rise in (GLD) after the bottom in December was in lockstep with the fall of the Greenback. However, starting in June the ultimate safe haven trade has struggled even in the face of continued dollar weakness.

Benign inflation certainly hasn’t helped the (GLD) price action. Central banks are quick to tell us they expect inflation to meet their target failing to recognize that cheap oil which touches the cost of many products, is a secular not cyclical dynamic.

Geo-political instability or military action often provides a lift in Gold. However, following North Korea’s test launch of an ICBM near the July 4th break, gold barely budged dashing hopes of a breakout.

Bitcoin the rising threat?

Crypto currencies and of course Bitcoin have captured the attention of nearly every speculator on the planet. There’s no doubt the underlying technology, blockchain is here to stay. Many banks including JP Morgan (JPM) are exploring it as well as developing their own systems.


It wasn’t that long ago I interviewed NASDAQ Vice Chair Sandy Frucher for iHeart Radio who told me to expect NASDAQ to embrace blockchain for its back office and clearing operations.

Gold has long been the alternative to fiat currencies giving it’s holder a hard asset that retains value in the face of any geo-political, inflationary, or economic challenge.

How much is that worth in the face of competition? Therein lies the concern. The first human interaction with gold likely took place nearly 3,000 years before Christ so some 5000 years of history. It’s way too soon to write off gold as the alternative currency of choice but competition usually means lower prices.

Bitcoin’s success will likely come at the expense of Gold and provide another example of the zero-sum-game.