The Fall of Pseudo Safe Havens

Gary Gibson, Minneapolis, Minnesota (of Whiskey & Gunpowder)...
The Swiss franc as a safe haven? Not so much anymore...
The Swiss National Bank believes that the Swiss franc is massively overvalued. And they're simply not going to tolerate it. In fact, they are going to fight this overvaluation aggressively. They mean to keep the franc to under 1.20 euros and they are "prepared to buy foreign currency in unlimited quantities" to do it.

But why is the Swiss National Bank so upset about a strong currency? Well, just think about the poor export market. People the world over may love the Swiss franc and want to buy it...but a strong Swiss franc means relatively expensive Swiss goods. People in other countries would be less keen on buying those expensive goods. So the export market could suffer. Tourism could take a hit too.

Why wait for messy market when you can settle for quick, neat political solutions that will guarantee great pain down the road? Want to bolster exports and make unemployment your neighbor's problem? No problem! Just devalue your currency...
Bolstering the export market has often been trotted out as one of the very best reasons for having a "flexible" currency in the first place. But it's a zero sum game with only temporary advantages.

Country A devalues and makes its exports cheaper and more attractive, essentially exporting unemployment as well... Country B, however, doesn't need to stand for that because it too has a flexible currency that it then devalues. And so and so on, countries chip away at the value of their currencies for short-term gain. In a world of unbacked currencies, this beggaring of neighbors and buggering of savers can go on till everyone is at the bottom.

These days the franc is often included in the same sentence as gold when pundits talk about "safe havens." We've never really agreed with that. No matter how often the Swiss central bank acts kinda cool, we never forget that it is in fact a central bank. The soundness of the currency it issues has the same guarantees as other untrustworthy unbacked currencies...like the U.S. or Zimbabwe dollar.
Buying the Swiss franc as a safe haven makes little more sense than buying U.S. debt as a safe haven. Investors are still under the delusion that they can trust U.S. treasuries, but they may be starting to understand that the Swiss franc's stability is as reliable as a politician's promise.

Of course gold is still the ultimate safe haven, something that the world is slowly remembering as yet another "safe haven" falls. Even though gold is no longer the bargain it was just a few years ago, it's still looking like just about the best bet.

Below Simon Black examines the Swiss franc devaluation, gold, and what you can do right now to make these new circumstances work for your bottom line.

Whiskey & Gunpowder
by Simon Black
September 6, 2011
Cairo, Egypt With Immediate Effect The Swiss National Bank has just announced that it is putting a ceiling on the franc's appreciation against the euro... effectively abandoning its economic sovereignty and putting its future in the hands of woefully corrupt and incompetent bureaucrats. On the news, the franc fell off a cliff, dropping almost 10% INSTANTLY. Gold priced in Swiss francs jumped from 1497 to 1620 per troy ounce, all in about 45 seconds. Precious metals are now all alone as the only forms of sound money that are truly safe havens.

Just 6-weeks ago on July 27th, in a letter entitled"Should I buy gold at its all-time high", I wrote: "Even stronger currencies like the Swiss franc have limits to their appreciation. At some point, the Swiss National Bank will impose capital controls to thwart the rise of its currency...

[Y]ou'll probably feel like a sucker for not buying gold at $1600 when you still had the chance." Since then gold has soared roughly 20%, and as of this morning, the SNB has imposed capital controls to thwart the rise of its currency. This is just the beginning. The Swiss government has basically told the world that they will print as much money as it takes, and buy up as much crap sovereign debt as they can, to competitively devalue the currency This essentially puts Switzerland in the same sinking boat as Italy, Greece, and Portugal... with one key difference: Switzerland has 0% interest rates. In other words, you can now borrow in francs at 0% and buy government-backed euro garbage yielding 5%, 10%, 30%.... with absolutely no downside currency risk.

Here's a practical example you can do -- opn a FOREX trading account and borrow Swiss francs at 0.5%. Buy the EURCHF cross and simply hold euro cash, paying 0.65%. At 100:1 leverage (quite common in FOREX trading), that translates into a 15% return simply for HOLDING CASH with no downside currency risk. It's free money, courtesy of the Swiss National Bank. I'm just waiting for the next wave of margin hikes. Needless to say, this is utter madness and will absolutely hasten the end game for Europe.

A few other points to make: 1) Big Swiss exporters like Novartis and Nestle are dancing a jig right now as this will surely boost their sales in the short-term. Also, banks in Switzerland and Austria who had heavy exposure to Eastern Europe are breathing a sigh of relief right now. You see, Swiss interest rates have traditionally been lower than in Europe's emerging economies.

For example, many Hungarians took out mortgage loans in Swiss francs because the borrowing rate was so much cheaper. Once the Swiss franc began to rise, however, borrowers had a difficult time paying back the loan; suddenly their mortgage payment and balance were much higher than before, and default rates soared. Banks in Austria, Germany, and Switzerland who wrote most of the loans were sitting on huge potential losses... and this destruction to the financial system has been mitigated thanks to today's move. I have to imagine this had some influence in the decision.

2) For all the talk of a pullback in gold, this is only further reason for a rise in precious metals. It's true that nothing goes up (or down) in a straight line, but given that the world just lost nearly its last remaining safe haven currency, there are few other asset classes to turn to.

3) Markets are not functioning properly. Competitive devaluation means that governments are all striving to out-print each other... Europe is printing as much as they can to bail out the PIIGS, Switzerland just signed up to join then, Japan and China are not far behind, and QE3 is set to launch soon in America. With so much money sloshing around the financial system, there is absolutely no sense of value anymore; people cannot invest with confidence given all the massive bureaucratic intervention

4) In the Swiss National Bank's brief statement, they said"With immediate effect, [the SNB] will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities." The three key words here are 'WITH IMMEDIATE EFFECT'. This is just another example of a government making instant changes that pose dramatic risk over people's lives and livelihoods........ ...... Regards, Simon Black

Currency devaluation is all the rage. All the cool currencies are doing it. So today Switzerland moves from the boring, sober lifestyle of its buddy gold to hang out with the cool, hard-partying currencies from the U.S. and Zimbabwe. And so...yet another currency falls to the false promise of currency devaluation..

This move by the Swiss gives investors one less inflation hedge to use in their arsenal. Albeit the Swiss Franc was still paper money and therefore inherently a poor choice, it, like the one-eyed man in the land of the blind, was better than most. But not better than gold. Gold doesn't represent anyone else's liability. It can't be conjured up by competitively devaluing, bankrupt governments. Gold continues to shine even as we type this morning it's up $15 and change. So what do you do to protect yourself from the unending line of governments willing to debauch their own currency.?..... .....

Regards, Gary Gibson
Managing editor, Whiskey & Gunpowder
ggibsonagora@gmail.com