Being renowned as a safe haven asset, gold is most obviously known to perform well during periods of economic instability. Less obvious is that it also provides essential comfort during times of political unrest.
Political unrest can lead to economic instability
While the current global economic downturn is well documented, we’re also now seeing increasing political instability as a consequence of the financial crisis. This can further support the notion of seeking a safe haven for your money for several reasons;
- Political unrest inevitably leads very quickly to falling consumer confidence
- A weak Government can be desperate to maintain political power and its policies can often reflect the need for popularity rather than focus on dealing with debt reduction
- A ruling party who comes under significant threat from political opposition can be indecisive as they lose seats and therefore the ability for strong policy decisions, especially in a coalition arrangement
- A change in power can also provide a change in direction, derailing austerity plans
We are now seeing a number of these examples playing out. In the UK, the already split coalition Government had a disastrous local election campaign, losing many seats up and down the country to Labour. This could be disastrous as the Government becomes increasingly desparate to prove it has the economy under control despite the double dip recession. This could either lead to radical measures in an attempt to prove its resolve or backtracking to pander to public demand. Either way, fingers are already being pointed by Conservatives at Lib Dems and vice versa in the political blame game. The early coalition fissures are now becoming cracks at the very time the UK needs solidarity and strength.
Over the channel in France, new socilaist President Francois Hollande wants an economic recovery focussed on growth, not cuts. In fact a challenge to the fiscal belt tightening imposed by the EU was pivotal in his election campaign. This has already led to Germany warning France must stick to EU austerity plans.
Political unrest seems even more prominent in Greece as they admitted failure to form a coalition Government due to extreme political rivalry. This has sparked fears Greece will leave the euro – raising the possibility of new elections next month. This could let in the left-wing Syriza party who have vowed to oppose the very austerity measures designed to stabilise the Greek economy. The IMF will only pay the next round of bailout cash if Athens agrees on £12billion of new cuts next month.
Finally, the world’s biggest economy is also suffering from weakness. Barrack Obama has proved incredibly unpopular but is now pushing forward with sweeping policies to leaave his mark before the upcoming elections which could undermine their ability to reduce the huge debt mountain. Top of the agenda are student loans and health reforms both of which will cost the Goverment billions.
The likelihood is that these political pressures will deepen before they are rectified due to the intense economic restraints currently on all involved. One thing’s for sure, I’d prefer to have some gold in my portfolio while I watch the political mire unfold.