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Back to Safe Havens

September 2015

By Bruce Powers, CMT, Chief Market Analyst at MarketsToday.net, and President at WideVision

Gold back in the groove; gilt yields fall; major currencies make a comeback as investors rush for cover amid China chaos and global market selloff

As global equity markets, commodities and emerging market currencies sold off last month there were a few safe havens. Gold, developed nation bonds, and some developed market currencies strengthened. Meanwhile, the probability of a US Federal Reserve interest rate hike diminished given growing concerns about deflation rather and inflation, and worries of a further slowdown in the Chinese economy and falling commodity prices. If global equity and commodity markets face aggressive selling again, these assets should help diminish the negative impact on a portfolio.

Government bonds maintain favor

While global markets were reeling demand for government bonds increased. The relaxing of inflation expectations could help keep yields low for a while longer. Even if the US Federal Reserve decides to raise rates in September, although this seems less likely now, weakness in global markets would counter upward pressure on bond prices. Keep in mind that as bond prices rise, the yield declines and vice versa.

US Treasuries rallied for much of August driving yields down to their lowest level since April. The US 10-year Treasury bond yield fell to a low of 2.01%. Yields on Germany’s government bonds also fell, with the yield on the 10-year bund dropping to 0.56% during the global selloff. The British 10-year Gilt saw yields fall to 1.671%. Bond yields will typically rise (bonds fall) when there are higher economic growth and higher inflation expectations.

Currencies that have been slowly recovering saw demand rise

The US Dollar Index rose sharply from its May 2014 low of $78.90, increasing over 25% before topping out at $100.39 in early-March. Since then the US dollar has been retracing those gains. Given the significance of the appreciation during a relatively short period of time, it wouldn’t be surprising to see further weakening in the near-term. As the dollar weakens the Euro, British Pound, Swiss franc, and Japanese yen strengthen. Each of those currencies saw significant moves during the August selloff, further reversing declines that started from around mid-2014, which is also when oil started to collapse. In the case of the yen for example, it rallied to where it was in January relative to the dollar.

Gold regains its luster

Although gold fell to $1,072.15 in late-July, its lowest price since February 2010, it was able to rally to a high of $1,170.19, while global markets plummeted. There was not a rush into gold, as many might have expected, but it did provide protection, rising as much as 8.4% above the July low. The July drop into recent lows signaled a continuation of the almost four-year downtrend. So, downward pressure kept it from breaking trend and the long-term downtrend remains in place. This may not yet be the time for gold to bottom long-term, but it is a place to go for some protection if further weakness hits global markets.

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