What’s the best hedge for geopolitical turmoil?

That question’s a bit of a red herring. There’s no hedge for a geopolitical worst-case, and hedging anything short of a worst-case is notoriously difficult and very often ends up being more trouble than it’s worth. Or at least in my experience.

Certainly, there’s a case for adding and maintaining more commodities exposure in portfolios than you might’ve in the past, and for my money, USD cash at 5% is worth holding too. I like Treasurys here given the asymmetric return profile, but they’ll be a falling knife for another few months, and the idiosyncratic story behind the long-end selloff means USD duration isn’t going to be a reliable hedge right now.

Other than commodities, cash and bonds for the brave, I’m inclined to let the chips fall where they may in a world at war. Trying to bob, weave and dodge cruise missiles with gold, JPY and CHF is a fool’s errand if you ask me, but… well, who asked me, right?

There’s been a lot of chatter over the past two weeks about the appeal of the franc amid increasingly foreboding headlines out of the Mideast. The search for a dependable haven took on an extra sense of urgency as Treasurys failed to sustain a fleeting rally seen during the first days of the Israel-Hamas war earlier this month.

For those interested, the excerpts below, from Goldman’s Kamakshya Trivedi, are at least worth the 45 seconds it’ll take you to skim them.

Hedging geopolitical risk: The frank Franc tells it like it is. It has long been said that “Swissy never lies.” When the Franc is appreciating, it is generally a sign of market worry, and it tends to be a reliable indicator of ‘intangible’ safe-haven flows. These characteristics have already been on display in the weeks since the escalation of conflict in the Middle East, and we expect the ‘Sage Haven’ to continue to be a dependable gauge of market sentiment and an effective hedge in the case of further escalation. Historically, the Franc tends to appreciate in times of geopolitical turmoil and escalating inflation fears. This relationship is supported by a variety of fundamentals including Switzerland’s large international investment position surplus and a historical record of neutrality. CHF has many of the same characteristics as gold in circumstances like this, and that too is partly rooted in fundamentals. Uncertainty can create a surge in demand for the precious metal, which is one of Switzerland’s main exports.

Looking across a number of relatively recent instances of conflict, we find that the Franc typically performs similarly to gold. This is also consistent with the Franc’s performance during historical episodes of broader military conflict or accelerating inflation (which often go hand in hand). For these reasons, current circumstances have made CHF an attractive option for investors and the preferred hedge compared to other safe-haven currencies.