Evercore Pan Asset

The dream portfolio for the last few months would have contained a large holding of gold, Swiss franc deposits and German government bonds. The lucky holder would have paid good money to keep the gold safe, receiving no income. He or she would have received precious little interest on deposits in Switzerland. The German bonds would have yielded a low income by past standards for government bonds. He or she would have made good capital gains. They could have watched shares and some higher yielding government bonds around the world crashing, failing to meet the successful investment returns on this fund.

In recent weeks fear has gripped the main markets. So individuals and some professional investors have dumped riskier higher yielding investments, and headed for the so called safe havens. There is a feeling in the markets that assets like gold, Swiss francs and German bunds only have one way to go, and that is up. So what could go wrong?

In the end what goes up speculatively usually comes down again. Gold has had long periods out of favour, difficult though that may be to remember right now after such a great bull run. The bulls are dusting down suitable time period comparisons to suggest gold has not done more than it should in inflationary times. It is being treated as real money, even though gold standards were abolished long ago by the major players. One day its fortunes might turn. We will be left with working out what the sustainable demand for gold will be for jewellery and adornment. In the meantime, speculators, Central Banks and investment buyers are rushing whilst stocks run out.

The Swiss franc seems a natural harbour for cautious money, at a time of quantitative easing, broken banks and inflationary pressures elsewhere. Backed by good Swiss housekeeping, the Swiss franc keeps piling onwards and upwards. It’s a confounded nuisance to the Swiss authorities. Their currency is being driven ever higher, hitting their capacity to export competitively. Trying to control money growth when the whole world is beating a path to your door to deposit with you is not easy. The Swiss government is looking at options to keep the currency down or even to lower its value. They are openly discussing linking it to the Euro.

The rise and rise of the German bund is perhaps the most extraordinary of the three. After all Germany is at the heart of the Euro crisis. Far from being a safe haven in Euroland, Germany is under pressure to come the paymaster of the whole zone, with a little help from the few smaller countries that are in good financial order. If the Euro is to be saved, Germany will need to borrow more to lend to the weaker countries. This will not be good for her credit rating. It does not seem to matter at the moment in the markets.

All the time markets have reason to be worried about the solvency of some Euroepan banks, about the over-borrowing of some Euroland countries, about the slowdown in world growth and the political difficulties in addressing the deficits these so called safe havens can do well. It would be wrong, however, to think they too are permanently safe. It is also wise to remember they pay little or no income. In the end investments are there to pay you income. Growing income is the usually in the long term the best way of making money. Next week I will look at what a contrarian might say now about the higher yields available on shares and property.

As published in Investment Week