As governments across the globe have adopted looser monetary and fiscal policies, investors alarmed at the prospect of higher price inflation have been asking us whether it would be wise to turn to the reputed “safe haven” of Swiss franc denominated assets or by investing more heavily in gold.
AIER contends that consumer price inflation is arguably understated, and that the threat of accelerated inflation in the future has grown. The Everyday Price Index (EPI), which tracks prices of everyday goods and services, has been rising far more rapidly than the broader Consumer Price Index (CPI). Furthermore, while no one knows for certain if or when the CPI will spike, it is clear that bank reserves are mounting and pose a looming threat to price stability.
The Swiss franc has earned a reputation as a safe haven currency. The Swiss Central Bank (SCB) has long embraced a far more conservative monetary policy relative to other central banks. Compared to the dollar the franc’s purchasing power has held up well. The SCB, however, has become a victim of its own success. Beginning in August 2010, as fears of a euro collapse mounted, investors piled into the franc and pushed the euro price of the franc to an all time high. But as the Swiss export prices rose, the economy slowed. In August 2011 SCB Vice President Thomas Jordan conceded that pegging the franc to the euro would not be ruled out. The franc fell sharply in response, and since January the two currencies have traded within an extremely narrow range. U.S. investors seeking a safe haven in the Swiss franc would instead appear to be simply assuming the exchange rate risk inherent
in the euro.
Investors should continue to devote only between five and ten percent of their portfolio to gold. Research indicates that gold serves well as a hedge against financial disruption; it has also maintained its purchasing power during periods of extreme price inflation, and is not strongly correlated to the returns of our other recommended assets. But the gold price is far too volatile to serve effectively as a hedge against moderate but persistent price inflation, or to merit a large weighting within a portfolio.
Our other recommended assets (including stocks and bonds) are priced to reflect current information, including expectations regarding future price inflation. The best hedges against unexpected price inflation are cash equivalents, short-term fixed income securities and Treasury Inflation Protected Securities (TIPS).
Also in This Issue:
Balancing Your Fixed Income Decisions
Active Managers Versus Free Markets
Good Versus Bad Risk
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles
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