Going into November of this year, the S&P500 had returned over 13 per cent, yet over the last few weeks we have seen equity markets give much of their gains back (see Figure 1). Gold, however, at this point seems to look rather resilient. As uncertainty in the global market place continues to be a common theme the insurance of preserving an investor’s wealth, which may be provided by precious metals, is becoming more and more apparent.
Two events continue to cast a shadow over the global market place. The more prevalent one as of late is the on-going negotiation surrounding the US fiscal cliff, and this is complemented by the inability of lawmakers in Washington to compromise and work together to put forth a deal. Ostensibly, it seems without doubt that the US Federal government will be able to both cut spending and raise government revenues from taxes in order to avoid economic contraction, but for some reason equity markets do not seem to be reacting in accordance just yet.
The second follows a similar tune of what has continued to roil financial markets since 2009. The Euro Zone has now entered into a double dip recession, and as we look forward the near term outlook is only for it to get worse.
What were economic power houses like Germany and France advanced in the last quarter at extremely modest paces of 0.2 per cent respectively, and this as their growth is forecasted to turn negative next quarter. Furthermore, this recipe for economic contraction is fed by social unrest in the peripheral Euro Zone nations stemmed from continued budget cuts and high youth unemployment.
The greatest threat to Euro Zone remains these populist movements from extremist political parties in countries like Greece that would only act to cut off their nose to spite their face. Where with some potential and hope for a US economy to get back on track, Europe still remains heavily in question.
Since the Sub-Prime Mortgage crises in 2008, global uncertainty has been a common theme continuously associated with financial markets. And while conditions seemed to have calmed in North America and we are not seeing the rampant volatility of the past few years, developed nations are still feeling the burden of sovereign debt and its hindrance on growth remains in place. It becomes very difficult to fathom why a forward looking stock market would produce what might be deemed “normal returns” when countries like Canada and the US advance at around 2 per cent, and Europe collectively is contracting.
The aforementioned reasons add to why gold still remains as attractive as ever. Not even for the potential returns that some investors expect to see as we are over 10 years into what has been a very lucrative bull market. But rather that in periods of economic uncertainty, it is the preservation of wealth that is of greatest importance and exposure to gold plays a role in that.