Coincidence? I don't think so

by David Taylor

 

In the past 24 hours we have seen further unrest in the middle ease, little respite in Japan, and more political upheaval in Europe. We have also seen gold touch record highs ($1438 US/oz). It speaks for itself - investors worldwide are concerned about a number of areas and are choosing to invest in safe haven assets, particularly in gold.

 

Demand for gold comes from investors looking for a hedge against inflation and a 'safe haven' asset. It's also used as an alternate currency (e.g. sharp fall in the euro). In short, investors want their money to work hard for them, and when the risks of investing in more mainstream assets becomes too great, they look for alternative opportunities. They key aspect of gold, however, is that it doesn't produce income. Debt generates interest, equities provide dividends...gold simply offers a capital gain.

 

They key overnight event for gold though was the resignation on the prime minister in Portugal.

 

We know that Ireland and Greece are in serious financial strife. They're essentially under the stewardship of the European Union and the International Monetary Fund. Portugal doesn't want to suffer the same fate. Unfortunately though they're going about it the wrong way. With this recent resignation they have essentially put a halt to any short term austerity measures.

 

Portugal needs to hand over 4.23 billion euros next month. Back in 2009 Portugal's budget deficit was just under 10 per cent of GDP. Prime minister Socrates was looking to get this down to a little under 5 per cent this year. That's what needs to happen.

 

Financial markets tend to respond in the same way as human reflexes. They respond quickly and usually overshoot. Today was no different. The euro fell around 1 per cent on the news and gold climbed to a record high.

 

Portugal is well on the way to being the next sovereign to ask for assistance. Meanwhile gold, I believe, is one commodity to keep a very close eye on.

 

David Taylor

Disclaimer

The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.