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Another Reason to Buy Gold: Franc Losing Safety Status

Tuesday, 6 Sep 2011 | 2:17 PM ET

Just as talk had begun to intensify about a gold bubble building, the metal got another boost Tuesday when the Swiss National Bank announced measures to decrease the value of the franc.

Mark Hooper | Getty Images

The SNB's move was widely viewed as positive for gold because the metal will gain even more popularity as a safe-haven investment of choice.

For the past 14 months—and, in fact, since Lehman Brothers failed in September 2008—the franc has experienced a parabolic rise as financial instability beset many of its neighbors as well as the US.

But the Swiss central bank, faced with worries that the ever-strengthening currency would jeopardize the country's export-based economy, announced an aggressive cap for the franc's valueagainst the euro.

Consequently, the currency tumbled more than 8 percent in Tuesday trade. Gold, while down narrowly amid a global asset selloff, is expected to fare well in the days ahead.

"With Japan massively intervening in the (currency) market and the Swiss effectively curbing the safe-haven status of the Swiss franc today, we only really have gold as the last-standing safe-haven currency around," David Rosenberg, senior economist and strategist at Gluskin Sheff in Toronto, wrote in his daily note. "While the US dollar has liquidity, it unfortunately has a debt burden alongside it that gold does not."

To be sure, the dollar was among the few winners immediately after the SNB announcement, gaining more than 1 percentagainst a basket of the world's currencies in risk-off trading. The so-called commodity currencies—from Canada, New Zealand and Australia—also fared mostly well.

But gold possesses the added advantage of independent movement, particularly important when most other market assets are moving in the same direction, a trend known as correlation.

"You're seeing gold becoming increasingly credible as that safe haven," said David Rodriquez, quantitative strategist at DailyFX in New York. "It's defied broader market deleveraging, which is pretty surprising. Given what we've seen with difficulties in fiat currencies, I don't see it going away anytime soon."

Rodriquez describes himself as normally "the opposite of a gold bug" because he anticipated that when economic conditions collapsed gold would go down as well.

"The S&P 500 and the Dow are off substantially from recent record highs and gold is setting a fresh record high," he said. "So it's not really a lot of speculative capital in gold. It's withstanding sudden bouts of deleveraging across financial markets."

Hedge fund manager Dennis Gartman, who writes the widely followed Gartman Letter, speculated this morning that a major nation holding gold would begin selling, setting off a potential fire sale.

However, he said in a subsequent interview that the SNB announcementwas "the odd event" and that gold is holding up because of its safe-haven appeal.

"You have just taken the franc and turned it from being a place where capital will go to and you've now effectively brought the Swiss (franc) into the euro zone," Gartman said. "They did it surreptitiously and without asking the electorate."

Gartman said he regretted ditching two-thirds of his position when gold broke the $1,900/ounce barrier but has replaced half those positions since. He recommends holding gold in non-US currency that yields more and has greater stability.

Stocks Slaughtered, Where's the Safehaven?
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Despite misgivings about what central banks' actions could have on gold, the narrative following the SNB move was that the metal had survived and likely would scale higher.

"To the degree that solvency ranks high and counterparty risk ranks high among individual investors, those concerns are going to drive money into the metals market," said David McAlvany, CEO of McAlvany Financial Group, a precious metals brokerage based in Durango, Col. "Maybe the primary question is, how low can various global currencies go in an effort by the world's monetary authorities to bring back financial stability and growth?"

Indeed, the threat looms of a global competitive devaluation—where central banks continue to debase currencies in an attempt to gain a leg up in the world trade markets—thus making gold even more valuable as an inflation hedge. Worries over global recession and the debt crises in peripheral Europe have only enhanced gold's attraction.

"Fiscal measures and austerity measures are not popular, which means that really the only place you can go are monetary measures," McAlvany said. "So if concerted or competitive currency devaluation is part of the next two weeks, two months, two years, then again you're asking the question: How much is that devaluation reflected in the price of gold today?"

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