What Switzerland's shock currency move means for you
By
MoneyWeek Editor
John Stepek Sep 08, 2011
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There goes another way to defend your money against inflation.
Yesterday, National Savings & Investments pulled its index-linked savings certificates (and the rest of them) from sale. It means that the best way for savers on any tax band to protect themselves from inflation has now gone.
We'd been nagging you to get hold of one since they went on sale back in April, so hopefully you bagged yours. If not, we'll be looking at the best alternatives in next week's issue of MoneyWeek.
But it's not just savers who are seeing their 'safe havens' closing down. Earlier this week, investors who'd seen the Swiss franc as a sure-fire way to protect their wealth got a nasty shock.
And the end result of this shock move is likely to be even more inflationary pressure.
How the Swiss are contributing to global inflation
The Swiss National Bank pegged its currency to the euro earlier this week, saying that it wouldn't allow the Swissie to go below 1.20 Swiss francs to the euro. In other words, it doesn't want the currency to strengthen.
That's bad news for anyone who'd bought into the Swissie with the view it was a 'hard' currency. But more than that, it will also add to global inflationary pressure.
As my colleague Merryn Somerset Webb points out in the latest issue of MoneyWeek (out tomorrow), it's quite possible for the overall economic environment to be deflationary (shrinking bank lending, deleveraging consumers) and still see price levels rise.
A big part of that is down to people's faith – or lack of it – in the medium of exchange they feel forced to use. As countries debase their currencies, first the wealthy, and gradually the less wealthy, decide they need to find more reliable stores of value for their money.
That's why not just gold, but the likes of collectibles, art and wine, have been rising so strongly. And certain currencies have been buoyed by the rush to 'hard' assets too.
Trouble is, as Dominic Frisby pointed out in yesterday's Money Morning, you can never quite trust any 'fiat' money to hold its value. The government can stick its oar in at any time to ruin your grand plans – as anyone buying the Swissie as a store of value has found out.
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Three reasons why the Swiss move could be good for gold
So what does this mean for your investments? Gold has fallen sharply over the last couple of days. But it's hard to see how the Swiss news can be anything but good for gold over the longer run, for three main reasons.
Firstly, it means the Swiss franc is now effectively a euro (for the time being at least). Anyone who put their money in Swiss francs looking for a strong currency has now been disappointed. They'll be looking to other 'hard' assets instead, of which gold should be one.
Secondly, the Swiss move means the gloves are off in the 'currency war'. There's a lot of sympathy for the Swiss in doing this. They don't see why their export industry – and therefore their economy – should take the hit for the eurozone. Imagine, for example, how strong the deutschmark would be if the Germans weren't in the euro.
But regardless of how justified the move is, it means a line has been crossed. It's now more acceptable for other countries to follow suit. Japan is the most obvious candidate. The yen is cripplingly expensive.
If the Bank of Japan decided to commit an unlimited sum of money to supporting its own exporters by effectively pegging the yen/dollar exchange rate, that could end up being very positive for Japanese stocks. For more on this topic, have a look at James Ferguson's recent MoneyWeek cover story on Japan: The Japanese bull market is finally ready to charge.
Thirdly, the Swiss peg to the euro basically means more money-printing. If the Swiss want to cap the value of their currency, they'll need to print more of it. That has consequences. It's potentially very inflationary. But in the short term, who wants to bet against a desperate central bank with limitless ammunition?
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The Swiss move could also be good for the dollar
In short, this is another big step in the overall race to the bottom for global currencies. That should increase demand for assets that can't be as easily manipulated, such as gold (although clearly it's not impossible for governments to interfere in the gold market).
However, another – perhaps unexpected – beneficiary of the Swiss move, certainly in the short term, might be the US dollar.
Why? Because as Mansoor Mohi-uddin of UBS writes in the FT this morning, "risk-averse investors" are running out of alternatives. It's quite a big step to go from holding a currency to holding gold. Those who would rather stick with paper now don't have many choices.
You could opt for a small, commodity-backed currency – the Aussie perhaps. But most of these are already very expensive and look vulnerable to corrections. The dollar on the other hand may seem a strange candidate for safe haven status. But it has the advantage of being very weak – there's a lot of bad news priced in there. The Federal Reserve might be able to print as much money as it wants, but one thing it can't do is peg the dollar to another currency.
So although the Fed seems likely to announce yet more quantitative easing-type measures, it may well end up looking like one of the least bad options for anyone searching for any sort of certainty in these markets.
My colleague David Stevenson wrote about how to play a stronger dollar in a recent issue of MoneyWeek magazine.
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After an eventful summer in the markets, a stormy autumn lies in store, says Bengt Saelensminde. Here, he looks at the challenges facing investors, and picks three trades that should see you safely through the tough times to come.
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