Safe-haven assets face fresh tests as gold and bonds swing

Traditional safe-haven assets are delivering uneven protection as investors confront AI-related technology-stock volatility, the Iran war, higher energy costs and growing government debt. The Economic Times Markets reported on October 21, citing Reuters, that the dollar had gained around 4% since late February, while gold was trading around $4,175 an ounce after reaching a January record of $5,595.

The divergent performance shows why demand for defensive investments does not necessarily translate into steady gains. Gold was sold to cover losses elsewhere after the war began, while rising borrowing costs have put pressure on government bonds. Investors are distinguishing more sharply between currencies, sovereign issuers and bond maturities.

Dollar strength meets debt and technology risks

The dollar's recovery follows pressure last year to reduce exposure to American assets. The report linked its recent resilience to the strength of the US economy, relatively high interest rates and the country's position as a major energy exporter.

Its longer-term outlook is less clear. US government debt has exceeded $40 trillion, according to the report, while policy uncertainty remains a concern. A retreat from technology shares could also affect the currency because enthusiasm for AI has attracted substantial capital into US equities.

Societe Generale chief foreign exchange strategist Kit Juckes suggested that the dollar could be nearing the later stages of its bull market. However, he also indicated that the energy crisis makes it difficult to maintain a sustained bet against the currency.

Swiss franc benefits from European uncertainty

The Swiss franc has gained more than 2% against the euro in October, putting it on course for its strongest monthly rise since late 2023. Pressure on French government bonds and election-related uncertainty in France and Spain have increased demand for the currency, the report said.

ABN Amro senior foreign exchange and oil strategist Georgette Boele linked the franc's strength to concerns about French public finances and political developments across Europe.

Investor positioning is another influence. With Swiss interest rates at 0%, the franc is used to finance carry trades: investors borrow in a low-interest-rate currency to buy higher-returning assets. Greater volatility has made traders less willing to use it for that purpose, while strengthening its appeal as a defensive holding.

Bond investors distinguish Germany from other borrowers

Government debt is not behaving as a uniform refuge. The report said US and Japanese borrowing costs had recently reached multi-decade highs as investors reassessed fiscal sustainability, weakening the defensive appeal of longer-dated bonds.

German Bunds have shown relative resilience. Earlier in October, German yields fell as US and French 10-year yields climbed to 24-year highs. Because bond prices move inversely to yields, that divergence indicated stronger demand for German debt.

Germany's top-tier credit rating and reputation for fiscal stability have supported its bonds during European market stress. TwentyFour Asset Management portfolio manager Johnathan Owen described Bunds as a useful defensive holding while investors assessed possible contagion from French and Italian bond markets.

Shorter maturities offer a different kind of defence

Some investors are reducing exposure to long-term borrowing risks rather than abandoning sovereign bonds altogether. Wren Sterling chief market strategist Rory McPherson said the firm favoured short-dated debt amid concerns about government borrowing and deficits.

Short-dated bonds generally respond less sharply to interest-rate changes than longer-maturity securities. That can help when persistent deficits and higher borrowing costs unsettle markets, although shorter maturities do not eliminate monetary-policy, inflation or credit risks.

Gold's volatility tests its refuge status

Gold's path illustrates the difference between a long-term store of value and an asset that rises during every market shock. After its January peak of $5,595 per troy ounce, investors sold profitable gold positions to offset losses elsewhere when the Iran war began in late February, according to the report.

The metal rallied again in August as inflation concerns returned and investors questioned whether the US Federal Reserve was doing enough to contain price pressures. Its reported level of around $4,175 an ounce remains well below the January high.

Central-bank purchases and demand for geopolitical protection have helped keep gold above $4,000, analysts cited in the report said. Julius Baer analyst Carsten Menke pointed to continued central-bank buying and renewed concern about US debt and interest costs as potential longer-term supports. Higher interest rates remain a constraint because gold itself pays no interest.