There are many different safe haven assets in the global financial markets. Traditionally, the balance between risk aversion and risk appetite would transfer capital back and forth between equities and bonds. During the worst of the 2007/2008 financial crisis, the split would find deeply liquid Treasuries and money markets on one side of the spectrum while derivatives and simple growth-linked securities suffered the worst of the exodus.
Fundamental Forecast for Gold: Bullish
- Hungary warns its economy in a “grave” position, default could be a very real scenario
There are many different safe haven assets in the global financial markets. Traditionally, the balance between risk aversion and risk appetite would transfer capital back and forth between equities and bonds. During the worst of the 2007/2008 financial crisis, the split would find deeply liquid Treasuries and money markets on one side of the spectrum while derivatives and simple growth-linked securities suffered the worst of the exodus. In the year that followed, a general improvement in sentiment would rank economies against other economies. Now, conditions have evolved even further. Considering governments hold some of the most unattractive assets (taken from banks and other private firms) and are running record deficits; fear now encompasses the traditional high and low risk assets, pits fundamentally strong economies against those that are week and isolates those securities that are attached to a sovereign default.
The kind of capital that is invested into government bonds is a different sort than the purely speculative variety. Typically, these funds are considered to be relatively safe as volatility is historically low and the risk of default is almost nil (hence using their yield as a risk free rate when calculating derivatives). However, where do you go when government bonds and the currencies that represent them are considered too risky? There are few other alternatives; but gold has a history of standing in as a currency in its own right. Is it a good alternative? That is debatable. Nonetheless, as the threat of sovereign defaults and currency dissolution, the precious metal looks more and more attractive. The commodity would advance this past week on warnings by the ECB that loan losses among regional banks would rise through 2011 and on again on Friday when the Hungarian government remarked that it was in a “very grave” situation. Though EU economies like Greece and Portugal show some level of possible default; officials have steered clear of sharing these concerns and instead have championed their efforts to turn their economies and finances around. This is why the Hungarian Prime Minister’s remarks that he didn’t “think it’s an exaggeration at all to talk about a default” are so remarkable. Will the Hungary follow through on this dour outlook? We may find out sooner than later.
Looking out over the coming week, updates on Hungary have the potential to be the most volatile threat to market stability. However, that isn’t the only market-wide risk that could drive capital into the safety of the ‘alternative’ asset. The G20 meeting over the weekend could theoretically elicit significant changes like a global change to banking reserves and liquidity (which could ultimately seize the global financial markets); but given the proposed deadline of December, a resolution now is highly unlikely. Looking for definable catalysts for uncertainty; there are few specific indicators that can shake confidence market-wide. Of particular interest are the rate decisions. The RBNZ is the only central bank that is expected to move. A hike could move the needle on the balance between risk / reward. Alternatively, the ECB and BoE decisions will not lead to any changes. However, the commentary that follows could offer clues to financial health that ultimately determines whether a downgrade could be in store for the future. - JK
This article taken by DailFX.c
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