Gold hit £1,000 an ounce yesterday for the first time ever.
No wonder. Both the dollar and the euro, the world's key reserve currencies, are under unprecedented pressure.
Things are going from bad to worse in the eurozone. Now that analysts have had a chance to digest the results of the bank stress tests, they can see that the European financial system is indeed incredibly vulnerable.
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As for the dollar, the US is only a few weeks away from defaulting on its debt. Yet, if politicians come to a deal on raising the US's debt ceiling, it just means the country will be racking up an even larger credit card bill. Hardly a positive for the dollar.
With nowhere else to turn, investors are piling into classic 'safe haven' assets, such as the Swiss franc, German government bonds, and of course, gold.
So what does all this mean for your portfolio?
The biggest threat to the European banking system
The main worry on investors' minds yesterday was the state of the European banking sector. The US debt ceiling issue remains very much at the back of everyone's minds.
The stress tests were already viewed as a joke. The refusal to admit that Greece might go bust, and test the banks accordingly, meant the results were never going to be taken seriously.
What has proved useful however, is that, as Lex in the FT puts it, analysts could now see in one place, "the extent of banks' exposure to the sovereign debt of Europe's peripheral economies." It turns out that "Italian, and especially Spanish, banks are heavily exposed to their respective sovereigns." This added transparency is a good thing. But it's made investors even more jittery about what could happen if the worst came to the worst.
The biggest worry is if a run on the peripheral banks developed. If you live in a country that looks likely to exit the euro, then the sensible thing to do would be to withdraw as much money as possible and shift it elsewhere. Because if your country exits the currency union, whichever new currency it adopts will collapse, and any domestically-held savings you have will go with it. (See my colleague Merryn Somerset Webb's recent blog post on capital controls for more)
As Capital Economics points out, if that happened, it's unlikely that the rest of Europe would be willing to or even able to - step in to prop up the offending country's banking system. They simply couldn't afford it.
This scenario may be a while off. But Greek banks have already seen deposits fall by about 14% over the past year. It all makes getting some sort of resolution on Greece even more important. Trouble is, that doesn't look likely. Europe's leaders are divided as ever, and history suggests they won't get it together without some sort of disaster forcing their hands.
In short, you can expect markets to remain turbulent for the foreseeable future.
What does this mean for your investments?
As you probably know by now, we've been fans of gold for a very long time at MoneyWeek. That hasn't changed. It might have hit £1,000 an ounce, but all the reasons to like gold are still firmly in place.
The financial crisis of 2008/09 hasn't ended. A rebound in the stock market does not a healthy economy make. We're still weighed down by debt, and at some point, that debt is going to have to be dealt with. Until it is, gold is likely to do well, as it's one of the only assets on the planet that is no one else's liability.
My colleague Dominic Frisby has just released his latest gold report. In it, he looks at the best times to buy gold, and the best gold mining stocks to buy now.
What about other ways to play the crisis? Well, it may seem odd, but the US dollar is still a 'safe haven' play. Despite all the to-ing and fro-ing over the debt ceiling, and threats from the ratings agencies, the US currency has held up surprisingly well. It strengthened yesterday, even as gold was hitting a dollar record, and other 'risk' assets were falling.
In fact, even if the US defaulted (which I don't believe will happen), I could see the dollar staying strong. Because a US default would send such waves of panic across global financial markets, there'd be nowhere left to hide. Investors would rush for the familiar havens, and the dollar would be one of those.
Better yet, compared to other 'safe havens', it's historically cheap.
My colleague David Stevenson wrote in more depth about why we're bullish on the dollar (for now maybe not for the long run) in a recent MoneyWeek cover story. Subscribers can read it here: The dollar: will it rise from the dead? If you're not already a subscriber, subscribe to MoneyWeek magazine.
But if you're a more adventurous investor, you might want to consider a punt in the currency markets. Right now, I think that being long the dollar against the 'risk-on' currencies in general is probably a good bet.
The one I'm betting against is the Australian dollar. The Aussie remains near a record high against the US dollar. The country has a huge housing bubble. Its central bank is starting to waver on hiking interest rates, which usually leads to a currency weakening. And ultimately, Australia is a play on the Chinese economy. So one of the easiest ways to bet on a slowdown in China is to short the Aussie dollar.
Spread betting is risky, of course. You can lose a lot more than your initial stake, and there can be big swings in the markets. But to find out more about tactics to help you improve your trading, sign up for our free MoneyWeek Trader email.
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This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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