Right now, money is flowing to safety. And one of the safest places is the Swiss franc.
You’ve been watching the TV footage. You know what’s going on.
Following the earthquake and tsunami that struck Japan on Friday thousands are dead or missing. Much of the north of the country is devastated.
In a cruel twist of fate Japan now faces a nuclear disaster on top of the destruction caused by the quake the tsunami.
Three nuclear reactors at the Fukushima Daiichi plant have gone into partial meltdown.
Efforts to cool the reactors using seawater have caused explosions as hydrogen, separated out from the seawater by the high temperatures inside the reactor cores, has mixed with oxygen in the air.
One of these explosions has ruptured one of the reactor’s containment systems. Radioactive steam is escaping. This is leading to unsafe levels of radioactive contamination near the plant and as far away as Tokyo.
If uranium fuel rods continue to melt inside the core of the explosion-damaged containment vessel, there is a strong chance that radioactive material will leak out and increase the level of contamination in the area.
The reaction of investors has been swift. The Nikkei 225 – a widely watched benchmark of Japanese stocks – plunged 10.5% yesterday. This followed a 6.8% fall on Friday. Global stocks markets have followed suit.
Reckless investors and momentum chasers are getting killed right now. Junior uranium miners – recent darlings of energy speculators – are down by between about 10% and 35%.
Bottom line: Unless you had a proper risk management strategy in place, right now you’re hurting…bad.
There is an easy way to protect your portfolio from the financial fallout from Japan.
First, you have to understand what I described here in International Living Investor last November as the “only two trades that matter” (The Only Two Trades That Matter Right Now).
As I said back then, these are the “risk on” and “risk off” trades.
When the “risk on” trade is in vogue investors swap their cash for stocks and other high yielding assets. “Cash is trash,” as they say, when investors are in “risk on” mode.
But when he “risk off” trade is in vogue, investors dump their stocks and other high-yielding assets and scramble to get into as much cash as they can.
Put simply, in times of confusion and uncertainty investment money moves into what investors perceive to be the safest investments.
During these times, investors don’t care how much profit they make. What they’re most concerned about is avoiding losses.
The dollar used to act as a “safe haven” in times of trouble. But as I pointed out more recently (If Your Savings Are in Dollars, You Need to See This Chart) the dollar failed to rally in the wake of the Arab uprisings and the increased uncertainty these caused. In fact, it fell. So although the dollar has traditionally been a safe haven asset, its future as one is uncertain.
The one place that beats all others when it comes to safety is a tiny landlocked country in the heart of Europe – Switzerland.
When uncertainty reigns, money flows to Switzerland…and the Swiss franc. This is how it’s been for years. And this is how it is now.
You can see this divergence between the Swiss franc and the U.S. dollar from the chart below. What this tells us is that not just any old cash will do in times of trouble. You have to pick the right currency.
I recommend you always keep an eye on your cash levels. Too many investors pump all their available cash into the markets. If an unforeseen disaster strikes, they rarely see that money again.
Right now, money is flowing to safety. And one of the safest places is the Swiss franc. So if you haven’t already, I recommend you consider buying shares in the CurrencyShares Swiss Franc Trust (NYSE:FXF).
This ETF is designed to track the price of the Swiss franc versus the U.S. dollar. And it’s a great low-cost way to add exposure to one of the world’s safest currencies.
