By Josh Saul
- Gold has moved down
- Spanish bonds are yielding 6.8%
- S&P 500 has lost 3.5% in 2nd week of April
- Inflation is dangerously high
- Sterling – 17 month high
Bank deputy governor Paul Tucker warned that inflation is ‘uncomfortably’ high at 3.6% and will remain well above the 2 per cent target for much of this year. Consequentially the government has decided to cease all current Quantitative Easing in a last ditch attempt to rescue the Pound.
Whilst the pound rose above $1.60 and €1.22, the issue in many critics’ eyes is, how long can we survive without QE? In the first instance Britain has come under immense pressure to contribute billions more to the Euro Bailout Fund. Secondly the UK needs to enhance GDP and spend within the economy and the only tool available in spite of low interest rates is to print more money. Critics doubt that the UK will be able to maintain their QE stance much longer…
Interestingly the enhanced value of Sterling has meant that it takes fewer pounds to buy the same ounce of gold thereby making it appear cheaper. Demand is in fact going up – especially with the S&P 500 dropping in excess of 3.5% and more so with gold prices representing a very strong buying opportunity at present.
Spain has become front and centre in the European debt crisis with Spanish bonds yielding as much as 6.8%. When that figure reaches 7% – Spain like Greece, Portugal and Ireland will need to be rescued. With France also being dragged into similar discussions the need for a larger Euro bailout Fund and pressure on the UK to contribute is stark.
Crisis and contagion within the global markets is clearly affecting confidence and the equity indices are suffering.
It’s like a house of cards; which card will be drawn first? QE or Euro Bail Out?
Either way, all likely outcomes point towards the masses flocking to gold just like China, India and Brazil.
Global political unrest adds fuel to the gold fire
Being renowned as a safe haven asset, gold is most obviously known to perform well during periods of economic instability. Less obvious is that it also provides essential comfort during times of political unrest.
While the current global economic downturn is well documented, we’re also now seeing increasing political instability as a consequence of the financial crisis. This can further support the notion of seeking a safe haven for your money for several reasons;
We are now seeing a number of these examples playing out. In the UK, the already split coalition Government had a disastrous local election campaign, losing many seats up and down the country to Labour. This could be disastrous as the Government becomes increasingly desparate to prove it has the economy under control despite the double dip recession. This could either lead to radical measures in an attempt to prove its resolve or backtracking to pander to public demand. Either way, fingers are already being pointed by Conservatives at Lib Dems and vice versa in the political blame game. The early coalition fissures are now becoming cracks at the very time the UK needs solidarity and strength.
Over the channel in France, new socilaist President Francois Hollande wants an economic recovery focussed on growth, not cuts. In fact a challenge to the fiscal belt tightening imposed by the EU was pivotal in his election campaign. This has already led to Germany warning France must stick to EU austerity plans.
Political unrest seems even more prominent in Greece as they admitted failure to form a coalition Government due to extreme political rivalry. This has sparked fears Greece will leave the euro – raising the possibility of new elections next month. This could let in the left-wing Syriza party who have vowed to oppose the very austerity measures designed to stabilise the Greek economy. The IMF will only pay the next round of bailout cash if Athens agrees on £12billion of new cuts next month.
Finally, the world’s biggest economy is also suffering from weakness. Barrack Obama has proved incredibly unpopular but is now pushing forward with sweeping policies to leaave his mark before the upcoming elections which could undermine their ability to reduce the huge debt mountain. Top of the agenda are student loans and health reforms both of which will cost the Goverment billions.
The likelihood is that these political pressures will deepen before they are rectified due to the intense economic restraints currently on all involved. One thing’s for sure, I’d prefer to have some gold in my portfolio while I watch the political mire unfold.