On The Absurdity of Safe Haven Flows

This is my response to Izabella Kaminska’s article in the FT:

http://ftalphaville.ft.com/2016/02/11/2153080/on-the-absurdity-of-todays-safe-haven-flows/  (registration necessary but no subscription needed)

In one way, Kaminska is correct in saying that rushing to gold as a safe haven is a symptom of an inefficient market. Capital should seek out the most promising, or stable opportunities, or whatever it is that convinces investors of greater future returns.

In another way, it is also a testimony of efficiency, of how quickly the majority of market participants – globally, to boot – can agree on gold as the current safe haven and place value on the commodity as the preferred shelter, relative to other options.

Kaminska also brands the act of safe haven as ‘charity’ and ‘capital donation’ to systems that are unlikely to give par value returns in the future.

So, is she correct? And hence, by extension, are investors irrational by collectively behaving so? Or is it a rational act on an individual level, but when summed up as a community of investors, become irrational, wasteful and inefficient?

On an individual level, investors are in a position where we need to put our capital in many places. Yet at the same time, we have no say nor control over the actions of institutions, organisations, businesses and law-making entities that may greatly affect the path of returns. This places investors in a vulnerable position. Even when the rights as shareholders are spelled out and protected, the actual compensation received when all the dust is settled is usually not commensurate with the burden of risk that we are asked to take.

A safe haven is, as it is called, a safety valve when capital preservation, at least for the short term, is the ultimate objective. Imagine a global investing environment absent of safe havens: the constant rolls of thunderstorms, the surge of unforeseen tsunamis of events, and very soon, the large portion of capital available will be scared capital. Thus, contrary to what we think as fear capital rushing to safe haven, this is brave capital seeking a temporary shelter in order to be able to fight another day.

Collectively, and for the long run, I agree, it is absurd that we have to continuously seek shelter rather than be assured that the risks we take are proportional to the situation, and unlikely to be randomly changed by other agents that had no business interfering, putting the investors at the whim of a policy, or trend, or devaluation. We are only just realising the spillovers of policy decisions, the impacts of negative rates, and the damaging possibility of currency wars between economies.

But this is the real world, and investors deal with facts on the ground and not some idealistic notion that our capital is there to reduce inequality, build bridges and better societies, improve living conditions and foster growth wherever we distribute and germinate our capital.

Individually we’re price takers, not price makers so if the best safe offer is to get 99.5% of your capital back rather than risking a double percentage point loss then that’s clearly something that many are willing to take.

We take the real world as it is, and to collectively agree on a safe haven means despite our vulnerability as a community of investors, by quickly agreeing on a placeholder for value, at least we have a method to protect ourselves, even if it means being branded absurd and irrational.

NB: Not pro or against gold, just a general discussion on the existence of safe haven.

 

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