Panic Room! Investors rush into gold and other havens as stocks near highs

Investors are piling into haven assets such as gold, the Swiss franc and cash as U.S. stocks approach all-time highs, looking to hedge big moves in equities amid economic uncertainty and a resurgent coronavirus pandemic.

Prices for gold are up 22% this year and stand near record levels, as the metal draws investors seeking shelter from a potential reversal in stocks. The Swiss franc is among the year’s best performing currencies and allocations to cash remain historically elevated.

The rallies in these assets - which tend to attract demand in uncertain times - have taken place alongside a nearly 50% climb in the S&P 500 from its 2020 lows, illustrating the conundrum many investors have faced in recent months.

While sitting on the sidelines has proven a disastrous strategy as stocks rallied, many have become unsettled by stretched equity valuations and a coronavirus resurgence that has all but extinguished hopes of a quick U.S. economic recovery. The S&P recently traded at 3,268, less than 5% shy of its Feb. 24 record high.

"The easy trade isn`t putting money in equities anymore," said Jim Besaw, chief investment officer at GenTrust. "The market might have gotten a little bit ahead of itself."

The firm has increased exposure to gold in clients` portfolios with the gold allocation on average tripling since April to as much as mid-single digits as a percentage of portfolios. GenTrust has also been trimming positions in technology stocks.

Meanwhile, a coronavirus resurgence in parts of the United States is heightening concerns that risk appetite could dry up if some states are forced to roll back their economic reopenings.

Only 14% of fund managers in a July survey from BofA Global Research believe the recovery will be a quick, “V-shaped" one, down from 18% last month. Cash levels among investors remain high on a historic basis, at 4.9%, the survey showed.

“After a spectacular spring for risk assets … we recommend applying plenty of protection," said Kit Juckes, chief global FX strategist at Société Générale, in a note.

He recommends buying gold, as the metal`s prices have risen during August in 15 of the last 20 years, according to the bank`s data. The bank also advises clients to buy the Japanese yen, another popular haven, as a hedge against potential volatility.

Other factors have also driven the moves in havens. Gold, which normally struggles to compete with yield-bearing assets, has become more attractive to investors after the Federal Reserve cut rates to historic lows. Gold has also drawn investors worried that unprecedented levels of stimulus could cause inflation to rise. Investors have also piled into inflation-protected bonds as a hedge.

"What`s driving markets right now is Fed action," said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. Her firm added gold to its asset allocation models in April.

Haven currencies, meanwhile, have been helped by a falling dollar. The U.S. dollar index is down 8% from its March highs.

Some believe caution amid a big stock rally is a sign that investors haven`t become overly ebullient despite the recent gains, and may sell their haven assets to buy equities if prices become more attractive.

Worries over valuations were a regular feature of the last bull market, which saw the S&P gain around 400%.

Still, investors like Jeroen Blokland, portfolio manager at Robeco, now see more value outside of equities. Blokland`s firm is betting against U.S. stocks while holding positions in high-yield bonds, commodities and the euro.

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His concerns include potential volatility stemming from the U.S. presidential election.

"Once we get this hiccup, it will be equities that will show that hiccup," he said.