With the United States quickly approaching the deadline for raising the limit on its debt load, squeamish investors are thinking about how they can preserve their hard-earned money. [Let’s discuss the alternatives: gold and silver, cash, currencies other than the USD, and the VIX.] Words: 683
So says Jonathan Ratner (www.FinancialPost.com) in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Ratner goes on to say:
“If the debt ceiling is not raised, the result would almost certainly be a recession,” said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets. [In addition,] the U.S. budget deficit has to be contained to keep investors in U.S. treasuries happy [and that] will only come via spending cuts, whether to Medicare, Social Security or government jobs… [As such,] where should investors go to protect themselves in [such] a doomsday default scenario? Here are a few ideas:
1. Gold and Silver
Gold is the ultimate safe haven, and its dramatic rise is a reflection of both fear and its role as a store of value. While the volatility of gold and silver prices means investors should’t dump their entire portfolio in favour of a stack of bullion under the bed, many believe a portfolio allocation of 10% is a wise move these days. A weaker greenback is bullish for commodities, since gold, oil and other resources are typically priced in U.S. dollars.
The U.S. dollar will surely take a hit in a default scenario, but the currency shouldn’t see a major collapse in the 10% range. Nonetheless, the likely sell-off that will simultaneously occur in equities, and bonds suggests investors might want to lighten up their market exposure. That should put them in a good position to take advantage of a wide range of buying opportunities once the dust settles.
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If the U.S. budget and debt negotiations break down, and a default looks increasingly likely, sentiment will turn even more negative. Whether markets will fully price the default scenario is impossible to guess but the best time to reload in stocks or bonds may come before an actual default occurs.
3. Other Currencies
- the Swiss franc and Japanese yen have rallied on poor U.S. economic data,
- the euro and British pound are taking advantage of U.S. dollar weakness,
- Latin American currencies also seem to offer more safety than the greenback, with the U.S. dollar hitting new lows against many of them…
- [while] strength in commodities will provide support for the Canadian dollar, Canada’s close ties with the United States make the loonie vulnerable as economic weakness may force the Bank of Canada to also postpone rate hikes.
4. The VIX
[The recent] reversal of sentiment on weak U.S. jobs figures indicates that times remain very uncertain yet, even before the weak number, traders anticipated significant volatility would continue throughout the summer. Uncertainties related to inflation and the overall health of the global economy, continuing developments in Greece, Portugal and elsewhere in Europe, and unpredictable policy moves by central banks around the world could lead to more fear among investors.
The VIX index, a measure of options volatility on the S&P 500, remains far below its March 2011 highs, and can easily be bought in an ETF providing investors with an easy way to hedge in more turbulent times.
- Raising the Roof – On a Higher Debt Ceiling That Is! http://www.munknee.com/2011/05/raising-the-roof-on-a-higher-debt-ceiling-that-is/
- Top Myths on the U.S. Debt-ceiling Crisis http://www.munknee.com/2011/05/top-myths-on-the-u-s-debt-ceiling-crisis/
- America’s Political Process Guarantees Another Financial Crisis! http://www.munknee.com/2011/03/america%e2%80%99s-political-process-virtually-guarantees-financial-crisis-2-0/
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above