People are flocking to safe investments

People are flocking to safe investments

This week we saw gold hit a 2-year peak; one day after many government bonds hit their highest prices ever. These moves are generally signs that investors are nervous.

What does this mean?

Often in times of distress investors flock to government bonds of wealthy countries and gold. The theory behind this is that gold will always be worth something tangible and governments will always be able to pay you back (even if the investment return is low), whereas stocks have a potentially high but uncertain return. It make sense that if an investor believes there may be a dip in the market that he or she would want to move there investment to somewhere that is perceived to be safer. It seems there are a lot of people with this view now.

Why should you care?

Low interest rates around the world can cause low interest rates in the US. We can see the European central bank and the Bank of Japan are directly buying government bonds and we can see it’s likely that the Bank of England will decrease it’s target interest rates in the summer.

When bonds go up in value remember the interest they pay investors goes down making it less appealing to investors. As a result of this many investors have been buying US government bonds that offer higher interest payments and we can now see the increased buying has pushed down interest rates in the US too.