Why Japanese and Swiss intervention could be good for gold

Investors seeking safe havens have piled into the Swiss franc and Japanese yen. But the authorities don't like it. And as they try to put off new buyers, gold could be one of the only options left.

It's a bit of a compliment to be considered a safe haven. Or so you might think.

But the Swiss and the Japanese could live without the attention, frankly. Investors fleeing the euro and the dollar have been piling into the franc and the yen to try to protect their wealth. The trouble is, the export sector is a major contributor to both countries' economies. And a strong currency of course makes exports more expensive, which is bad news for anyone trying to make a living that way.

A volatile currency is also unpleasant for countries which aren't used to having to deal with it. Bloomberg notes that the franc has risen by 42% since the start of 2008, having been relatively stable for 10 years. The Organisation for Economic Co-operation and Development now reckons the franc is the most overvalued currency in the world.

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So now both the Swiss and the Japanese have been taking action this week. Switzerland cut its base rate to 0.25% (from 0.75%) and began printing billions of francs. Japan meanwhile intervened in the currency market last night (our time).

Will it work? They picked the right time to do it they let the US debt ceiling nonsense get out of the way so that markets were no longer distracted by the high jinks, and fearful of the dollar. But at best, these sorts of gestures work only briefly.

As Philip Aldrick points out in The Telegraph, the Swiss National Bank sold $21bn of francs between March 2009 and June 2010. The Japanese sold about $7bn-worth of yen last September. Their attempts failed to keep their currencies down for long.

Yet there could be one beneficiary in the meantime: gold. Central banks are lining up now to buy the yellow metal, rather than sell it. So unlike with the Swissie or the yen, you're not going to see anyone piling in to try to drive the price down. Anyone hunting for a safe haven' might be even more tempted to put their money in gold now that even the safe' economies' central bankers are officially trying to devalue their currencies.

John Stepek

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.