EU Shocks Underscore Importance of Safe Haven Investments

The markets have shown themselves to be poor prognosticators in 2016, with Brexit and the election of Donald Trump as president marking major misses. While the first event drove large numbers of investors to safe haven investments, the so-called Trump Rally has put some pressure on gold and silver prices. Economic shocks beyond the U.S., however, serve as a reminder of the importance of precious metals in an investment portfolio. ¹

Three-Card Monte?

It is worth noting that the record-setting rise in the U.S. equities markets has served as something of a bright and shiny object for the world’s financial traders and investors. In fact, this distraction has allowed the recent referendum in Italy to pass virtually unnoticed, at least for now.

In spite of dire warnings of the consequences of a failed move to reform the Italian banking system, the markets have thus far yawned over the results from the December 4 vote. ² However, that does not mean they will be able to ignore the ultimate impact. Most observers believe there will be massive bank failures in the near future, and the EU is in no position to stave off that eventuality.

Even more significant, the European Central Bank has warned Italy it is watching the situation closely. The ECB has taken steps to prohibit Italy from using its own resources to aid the banks under threat of failure except in the most extreme case of possible systemic collapse.

Are the Dominoes Positioned?

If the Italians were the only European country experiencing economic turmoil, the issue would be very serious, but not quite so alarming. Much like scientists studying tremors prior to an anticipated earthquake, many close observers are watching the euro tremble. ³ They see not only the Italian crisis, but also potentially other catastrophic failures:

• The possible failure of Germany’s Deutsche Bank
• Ongoing crisis-level problems in Greece
• The massive and undetermined effects of Brexit
• The tenuous recovery of Spain from its economic pit ⁴
• An ongoing economic crisis in Portugal ⁵

Could the Euro Collapse?

Those who really understand the situation also know that the EU and national central banks are out of tools to deal with a major problem. More quantitative easing and negative interest rates are last resorts, not remedies.

The threat is so real and so significant it has resulted in a number of books and scholarly works that point to the growing possibility of a total collapse of the euro.

In addition to the series of individual national economic troubles, the very idea of a unified currency concerns many. Echoing concerns over fiat currency, economist Joseph Stiglitz disparages the euro as a fantasy with promises, “uttered by politicians unschooled in economics who create their own reality.” ⁶

Harbingers of Trouble at Home

Taken individually or as a whole, the overall threats to the euro’s survival, much less stability, are real. More importantly, these threats are growing, and with the possible exception of Spain, show no signs of remedy without a major correction or full collapse.

The impact of such a contagion of collapses could spur short-term gold investors caught up in the current financial revelry to flock to safe haven investments.

Ironically, market optimism over transitory events like the Trump Rally could prove a harbinger for imminent bad news. History has proven this to be the case. Recall that President Hoover enjoyed a run-up in stock prices that elated the markets. Nine months later, we entered the first phase of what would become the Great Depression.

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