The stock market is being very clear about how it feels about the current state of things—it isn’t very happy at all. The sovereign debt issue continues to be a thorn in the side of global investor confidence and, to be very frank, it could be the catalyst for a severe correction in stocks and currencies. Nobody can predict the future and it’s unclear as to how things will unfold in Europe; but investment risk for domestic investors remains very high at this time.
This makes the argument for having some serious exposure to gold ever more pertinent. If you’re checking, the spot price of gold has been moving higher lately and, in my view, $2,000 an ounce is an easy price target for the commodity if things go bad in Europe. Gold companies are already making money hand over fist, with gold over $1,000 an ounce. Anything over $1,300 an ounce is pure gravy.
Equity investors are still likely to migrate towards yield in this market. There just isn’t enough underlying growth in earnings for investors to expect much in the way of capital gains. Accordingly, institutional investors are looking for safer bets. And it isn’t just because the expectation for rising share prices is low; big investors are well aware of the sovereign debt problem and the potential for a cascading currency collapse in Europe. I can’t stress enough how big this problem could be for your pocketbook. Even though you might not own any euros, a currency crisis in Europe will wreak havoc on domestic stock markets. We all know how fast the stock market can crash, but, with currencies, the destabilization is much greater. It affects bonds, money markets, interest rates, and stocks. It’s an issue that’s going to be with us for a number of years.
This is why a conservative stance is warranted with an equity portfolio. The market is already expecting a solid earnings season and share prices aren’t likely to advance unless corporate visibility improves. It’s also a good argument for owning some gold, because global capital markets will continue to bid on the commodity, as there’s little growth in the global economy, there’s rising inflation, and there’s rising investment risk due to high levels of sovereign debt.
We’re actually in a state now where anything could happen to financial markets. Things could calm down in Europe and corporate earnings could impress. There just isn’t a reasonable way to figure out what’s going to happen over the coming months and that’s why extra caution for investors is necessary. There’s no need to commit new monies to equities at this time. Cash in the bank is always attractive.