There’s only one way to say it: investment risk in this market is high. The sovereign debt issue keeps rearing its head every other week or so and the developments in Europe are having a material effect on the domestic equity market. This entire issue is related to the mortgage financial crisis in that it illustrates that even countries can’t go on forever with spiraling amounts of debt. Eventually, you are going to get called out—even as a country.
No one quite knows where this issue will lead global financial markets, but you can bet that large, institutional investors are making plans for how to deal with it if investor confidence in the European bond market begins to unravel. There’s no greater risk to your investment portfolio than the sovereign debt issue. It will be with us for the rest of this decade and it must be addressed by policy makers.
This is why the spot price of gold hasn’t corrected nearly as much as other precious metals and other commodities. It’s the store of value and risk-haven trade keeping the price of gold solid. If the status quo remains with these two realities and we add in a declining U.S. dollar relative to other global currencies, $2,000 gold seems like an easy price target.
Financial markets are currently experiencing a well-deserved consolidation/correction. Most assets have been due for this and it’s no big surprise. A new trend in commodities is waiting to develop and all that remains is the catalyst required for investors to jump on board. As I’ve mentioned, debt defaults and/or country rating downgrades could be the next big thing.
So, with investment risk high and economic data showing lackluster numbers, all the market has to trade on over the near term are corporate earnings and visibility. If what companies report doesn’t make the grade, then we should be in for more downside in stocks.
Things are the way they are because of a lack of austerity, both at the individual and country level. The fact of the matter is that austerity hurts, but it’s exactly what’s required over the next few years to get things back on an even keel. What goes around comes around. For far too long, governments have been borrowing on the future of their own citizens in order to get elected. It’s happened in all Western countries and now all that debt is starting to bubble over.
As I’ve been writing for quite some time, I wouldn’t be in any rush to jump into the marketplace with any new bold vision or investment theme. There’s too much uncertainty out there to be making any big plays. I’d be a buyer of gold assets and select large-caps with solid dividends after we get a look at second-quarter numbers. Right now, it’s a waiting game, with the hope that things don’t actually fall apart.