Is Gold The Answer To The Next Global Financial Crisis?
(Kitco News) - New risks around Italy leaving the Eurozone could promptinvestors to reallocate into risk-free assets, such as gold, according to areport by Rosa & Roubini Associates.
If Italy was to threaten to leave the EU, a global financialcrisis could be triggered, stated the report. And aspolitical risks escalate,investors should adopt “moderate risk-taking stance, within a defensivepositioning,” wrote Brunello Rosa, CEO of Rosa & Roubini.
Rosa added that “gold will remain a crucial component ofdiversified portfolios, as a hedge against potential corrections across assetclasses.”
The head of the macro-economic consultancy firm explained thatthe implications of an Italian departure from the euro for financial marketsare falling equity prices, spikes in short-and long-term rates, and a rise incredit default spread premia.
“Political developments in Italy have catalysed investors’attention over the last few weeks, as the possibility emerged that the countrymight leave the Eurozone, or that its new ‘populist’ government might adopt amuch more confrontational stance on key EU matters, such as fiscal disciplineand migrants,” said Rosa.
Italy’s possible departure from the EU has re-emerged oninvestors’ radar due to the rise of populism in the nation, as evidenced by therise to power of the League and Five Star Movement, both parties which haveadvocated fiscal and monetary independence from the EU, the report noted.
“Italy’s two anti-system parties par excellence, the Leagueand Five Star Movement, have risen to power for one fundamental reason: themajority of Italians believe the euro has not delivered economically for thecountry,” Rosa & Roubini Associates said.
Italy’s real GDP per capita is now lower than when the eurowas launched in 1999, especially when compared to European peers like Germanyand Greece, which have seen real GDP rise since 1999.
According to Rosa, the Italian populist movement has ralliedbehind these statistics as reasons to leave the EU, pointing out that Italiansfeel “vindicated by those figures” when they say the euro made their countrybetter off.
Furthermore, support for the EU exit could be exacerbated byan inability to periodically devalue the currency as a way of re-gainingcompetitiveness, the report said.
Rosa noted that despite the euro’s apparent shortfalls,Italians may have forgotten its benefits of a single European currency, such asa lower interest rates and stable inflation, as well as a fall in the servicingcosts of Italy’s public debt.
The report warned that while Italians may initially behesitant to leave the single currency for fear of the costs of solitary exit,over time, Italians might be tempted to leave the Eurozone, once they feel “thatthey have what it takes to stand successfully on the global economic stage,including a still-large industrial sector that could export worldwide.”
The issue of a divorce from the EU may resurface as early asSeptember, the report added, when the new government will need to draft abudget to be sent to Brussels. Should this budget introduce a flat tax system,minimum income policy, or backtracking of the pension system reform introducedby the previous government, Italy may well be headed on a collision course withthe EU.
By David LinFor Kitco News
Follow @davidlinMTL
dlin@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.