IMF Credits Gold as a Safe-Haven Asset

Source: Eric McWhinnie, Wall St. Cheat Sheet  (4/17/12)

"While safe havens in the current financial system are limited, the IMF recognizes gold as an option for investors seeking portfolio protection."


The International Monetary Fund recently said that it expects commodity prices to fall this year as the global economy remains weak. In the organization's World Economic Outlook, it said, "Sizable downside risks to global growth also pose risks of further downward adjustment in commodity prices." The ongoing European debt crisis is slowing creeping back into focus as Spain faces rising interest rates. While safe havens in the current financial system are limited, the IMF recognizes gold as an option for investors seeking portfolio protection.

On Monday, fears about a weakening Spanish economy and its ability to finance its debt pushed the yield on the Spanish 10-year bond above 6%. It is the highest level on the 10-year bond since the European Central Bank launched its first Long Term Refinancing Operation last year. Concerns also spilled over into Italy, where bond yields increased to 5.65%. "If the price action is any indicator, Spain will find itself under more pressure over the next few weeks," explained a debt trader in London, according to the WSJ. The trader goes on to explain, "As we have seen before in Greece and Italy, once 10-year bond yields cross 6%, people start to get nervous pretty quickly."

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Spain, the euro zone's fourth largest economy, is scheduled to sell bonds at an auction this Thursday. The sale will be closely watched as any weakness in the auction will spark more insolvency fears. Although Spain and Italy are currently in the spotlight, insolvency issues plague the entire globe. In fact, Egan Jones downgraded the United States credit rating from AA+ to AA with a negative outlook earlier this month. Egan Jones said, "Without some structural changes soon, restoring credit quality will become increasingly difficult. Yields on 10-year Treasury notes have fallen to their lowest since early February 2010 with the Federal Reserve's aggressive purchases of US Treasuries. A concern is the rise in interest rates placing higher pressure on the US's credit quality."

The global credit crisis is diminishing safe haven options left and right. According to the IMF's Global Financial Stability Report, the number of sovereigns whose debt is perceived as a safe haven could decline by $9 trillion within four years, representing a 16% decrease. The IMF believes high rated government securities make up the bulk of safe haven options at $33.2 trillion. However, the fund also recognizes gold as a safe haven at $8.4 trillion, representing 11% of outstanding amounts of marketable safe assets.

As the financial crisis continues to unfold, investors will be forced to seek true safe havens that do not carry counter-party risk, such as gold and silver. This rising demand for these safe havens will continue to support precious metal prices and the current bull market. The IMF report states, "In the future, there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets. In principle, investors evaluate all assets based on their intrinsic characteristics." When it comes to bonds based on fiat currencies, intrinsic characteristics will leave investors low on value.

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Eric McWhinnie, Wall St. Cheat Sheet

Disclosure: Long EXK, AG, HL, PHYS