Is Cash a Safe Haven Asset?Kevin Douglas
The markets are on the brink of another serious downturn. We’re fast approaching another housing crisis and another oil crisis is imminent. Brexit has plunged the world’s economy into chaos. In such difficult financial times, the possibility of significant investment losses looms large, and many people are turning to safe haven assets to keep from losing their IRAs/401(k)s.
But the question is where do you find a reliable safe haven asset? Gold and silver are always good standbys, and T-bills can be good in the short term. But what about cash? It’s a physical asset which will always have value. Stocks may dissolve into nothing, but if you keep cash tucked away, you’ll always have something to fall back on, and a way to buy the things you need. So does that mean cash is a reliable safe haven asset? Well, no. There are a number of other factors to consider.
The Problem with Cash
It’s good to have cash stored away in the short term. That way if, for example, your credit cards are maxed out, your bank is overdrawn, or you’re a victim of identity theft, you still have a ready means of buying groceries and other necessities until the problem is resolved.
Unfortunately, cash by itself doesn’t work as well in the long term. There are a number or reasons for this. The first is simple inflation. Think of it this way: Your retirement fund is something you ideally build up over thirty or forty years. But thirty years ago how many groceries could you buy for $20? How much gas could you put in your car? And how far does that same $20 go today?
If you had simply put a $20 bill in a drawer 30 years ago and took it out today, you’d find it to be worth significantly less in terms of actual buying power. So you end up losing, even though you have the same amount of money. Now think of that in terms of your entire retirement fund. If it was all in cash, how much less would it be worth today than it was when you started?
To complicate things further, there are a variety of other factors that make the dollar perilously unstable over the long term. Quantitative easing, or the Fed’s artificial injection of cash into our financial system, lowers interest rates and increases the overall money supply, thus devaluing your currency in the long term. World events can have an impact on currency value as well. Brexit sent both the pound and the euro into a tailspin. What many Americans don’t realize is that he dollar stands poised to enter a similar crisis. The International Monetary Fund’s plan to name China’s yuan to their basket of reserve currencies this month threatens to displace the U.S. dollar’s role in international trade.
Finding a Safe Haven Asset
The purpose of a safe haven asset is to maintain and even increase its value, or buying power, over the long term. This is why simply storing cash for retirement over decades doesn’t work; it becomes impossible for your savings to retain their buying power.
So what does maintain its value over time? What kind of investment can protect you from unexpected market fluctuations, the devaluing of currency and other financial pitfalls over the years? The idea of having a physical asset remains a sound one. But instead of cash, a much smarter investment is gold. Gold generally remains stable over time, resists inflation’s wearing-away of buying power, and even tends to increase in value as the markets go down.
If you want to secure your IRA/401(k) against impending economic turmoil, then quit relying on cash, cash equivalents, and dollar-denominated assets and roll it over to an IRA that can hold gold as well as other market-based assets. It’s an investment that will keep your retirement fund strong and secure for decades to come.