I don’t like being the bearer of bad news, but we have to keep in mind the investment risks that are out there. One of the biggest risks to your pocketbook right now remains the sovereign debt issue. Make no mistake, the issue of government debt (around the world) and the ability to service it is so serious that you should be planning for several countries in Europe to go broke. In fact, they’re already broke; they just haven’t declared bankruptcy yet.
I’m not kidding about this issue. Sovereign debt affects the largest capital market in the world—currencies (many multiples larger than all the world’s stock markets combined) and when currencies convulse, institutional investors get scared. When that happens, big investors sell and little investors get squeezed.
In a report from Reuters, which is covering a European summit on sovereign debt, the Portuguese parliament is expected to reject new austerity measures to get its fiscal house in order. A rejection of these austerity measures would force Portugal to follow Greece and Ireland in seeking an international bailout (which we all know is done with borrowed money!). Portugal isn’t a big economy by any means, but there’s a pattern forming here and it’s very dangerous. JPMorgan Chase figures the likelihood that Portugal’s government will fall this week is “high.” These growing sovereign debt issues could be the beginning of the end of the euro currency, and that’s a major shock that could have a cascading effect on your pocketbook. It’s no fun thinking about risks to your investment portfolio, but we don’t have any choice. Politicians of every stripe haven’t been honest with us. Eventually, someone has to pay for all this spending.
Currently, the spot price of gold is holding up strong based on risks in the Middle East/North Africa and because of the European debt crisis. I think the price of gold is going to stay strong, because global investors are increasingly concerned about the protection of wealth—not just the creation of it. It’s similar to the subprime mortgage meltdown that spawned an almost catastrophic stock market selloff. The issue now, however, isn’t individual mortgage debt—it’s country debt and unless this issue is addressed by global leaders, the subprime mortgage crisis will seem like a hiccup compared to what will happen if currencies begin to fall. Like I say, it isn’t fun thinking about this stuff, but we don’t have a choice anymore. Politicians around the world have been too quick to make big promises without saying how they’re going to pay for them. I’m afraid a big reckoning is coming and it will about sovereign debt.