Will Gold Investments Save Your Portfolio From Europe’s Debt Crisis? Not Likely Over the Near Term

Why Mitchell Clark is saying that it’s not likely that gold investments will save your portfolio from Europe’s debt crisis over the near term.I’m bullish on gold investments (and silver) for the long term, but we’re in a situation now where financial markets are trading on fear, so any eventuality in any asset class is possible. What we saw in the stock market disintegration of 2008 was what Jim Rogers calls a “forced liquidation of assets,” with investors selling just about everything; not just to meet margins calls, but for the safety of cash. If the sovereign debt crisis and the lack of political will to deal with it go unabated for much longer, another major price correction is in the cards; not just in the stock market, but in precious metals and other assets as well. The trading action we have now in the stock market and precious metals is very worrisome. Things are beginning to cascade. See The Dilemma for Investors with Money to Spend on Stocks.

Getting back to gold investments; if there is a forced liquidation of assets, this would be an opportune event to take on significant new positions in precious metals. The inflation situation is getting worse in BRIC countries (less so for China) and the numbers in mature economies are pushing the upper limits of central banks’ ranges. There are good long-term fundamentals for gold investments; over the near term, however, anything can happen. The trading action in the stock market reflects global investor sentiment perfectly—it’s not very pleasant out there at all.

Investment risk has been high all year and it’s going up even further. Now that currencies are at risk and the solutions involve politicians, stock market investors are in a very precarious position. You might think that gold investments would be your best friend in this kind of environment, but because there’s so much uncertainty related to sovereign debt, currencies, economic growth, stock markets, inflation…the probability of another asset liquidation is increasing.

In this scenario, the U.S. dollar would strengthen and, because gold investments tend to trade inversely to the dollar, they would be under pressure, not just because of a forced liquidation of assets. Accordingly, it’s difficult to be bullish on gold investments in the very near term, even though I view them as some of the best stocks (for speculators) that the market has to offer.

The stock market will continue to deteriorate despite attractive valuations and good corporate earnings as long as the sovereign debt issue is not forcefully dealt with. The fact is that capital markets are significantly increasing eurozone bond yields because of a failure of policymakers to decisively address this crisis. And, despite its willingness, the Federal Reserve cannot bail out Europe. I’d say eurozone politicians have until Christmas to get a handle on things or the euro currency is finished…and this not good for the U.S. stock market, gold investments or not.