What does the US and European Debt Crisis mean to my Gold Investment?

European Debt Crisis

Growing US and European Debt crisis

With headlines dominated by economic woes in Greece and US, many investors have been asking if they should buy gold, and what the global debt crisis will mean to the market.

Greek MPs recently voted 155 to 138 to slash public spending as part of a £25billion austerity package that will also see taxes soar. With just 2 weeks before Greece’s economy ran out of cash, it will now get a £98billion EU lifeline, but even that will only last until September.  However, Bank of England governor Sir Mervyn King claims the money markets felt there was still an 80% chance if Greece defaulting in its debts. The Government and Bank are already drawing up contingency plans to deal with the potential fallout.

The European debt crisis now threatens to enter a devastating new phase amid fears that Portugal – like Greece – will need a second bailout and could spread back to Ireland or even to Spain and Italy.

Clearly none of us has a crystal ball, and there remains a multitude of possible PHYS01_Animated_Gif_1_MPUoutcomes across Europe. What we do know is that regardless of whether Greece or any other European country defaults on its debts, there is no overnight solution. Any bailed out nation still needs to pay back the funds meaning a prolonged period of high taxes, low spending and low to negative growth.

Importantly, this best-case scenario still provides s solid foundation for gold investment. As the most natural safe haven asset, gold has proved throughout history that it will perform well during these economic downturns.

If however, catastrophe does occur and Greece defaults, Portugal, Italy, Spain and Ireland follow in needing more funds to survive, and these countries start to withdraw from the Euro currency simply to survive; then we may witness the beginning of the end of the single currency.

I’d say the chances of this happening are in the balance, so if you haven’t done so already, it would be wise to buy gold, which undoubtedly would increase in value overnight by 10, 30% or 50% after such an event.  It makes sense, that while we don’t yet know what will happen, we should not bury our heads in the sand. We should prepare for any eventuality and protect our well-earned savings with some gold coins.

In America, Barack Obama has warned that unless his administration allows the US debt ceiling to rise in August from $14trillion, America could default on its existing debts – which would pose a “significant an unpredictable” impact in the world. I never thought I’d hear these words uttered by the ‘world’s safest credit’. This further need for borrowing is already being deemed QE3.

Again, none of us know the outcome of the August meeting. However, it’s fair to say that with the price of gold so closely linked to that of the US Dollar, that gold should benefit whatever the outcome.

If the Republicans decide to support Obama and approve a new ‘overdraft increase’ for the US, the market’s will likely see this as a sign that the Quantitative Easing programs have so far not worked and the US is running out of alternative ideas.

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If they don’t approve the extension, the President has already warned of the possible consequences, and a US default would see the price of gold sky rocket overnight and likely replace it as the world’s ‘reserve currency’.

We now live in unprecedentedly unstable times. While we cannot predict the future, the US and European debt crisis means the need for gold in our portfolios is more apparent than ever.

Daniel Fisher

Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.

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