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Is Gold The Answer To The Next Global Financial Crisis?

Kitco News

(Kitco News) - New risks around Italy leaving the Eurozone could prompt investors to reallocate into risk-free assets, such as gold, according to a report by Rosa & Roubini Associates.

If Italy was to threaten to leave the EU, a global financial crisis could be triggered, stated the report. And aspolitical risks escalate, investors should adopt “moderate risk-taking stance, within a defensive positioning,” wrote Brunello Rosa, CEO of Rosa & Roubini.

Rosa added that “gold will remain a crucial component of diversified portfolios, as a hedge against potential corrections across asset classes.”

The head of the macro-economic consultancy firm explained that the implications of an Italian departure from the euro for financial markets are falling equity prices, spikes in short-and long-term rates, and a rise in credit default spread premia.

“Political developments in Italy have catalysed investors’ attention over the last few weeks, as the possibility emerged that the country might leave the Eurozone, or that its new ‘populist’ government might adopt a much more confrontational stance on key EU matters, such as fiscal discipline and migrants,” said Rosa.

Italy’s possible departure from the EU has re-emerged on investors’ radar due to the rise of populism in the nation, as evidenced by the rise to power of the League and Five Star Movement, both parties which have advocated fiscal and monetary independence from the EU, the report noted.

“Italy’s two anti-system parties par excellence, the League and Five Star Movement, have risen to power for one fundamental reason: the majority of Italians believe the euro has not delivered economically for the country,” Rosa & Roubini Associates said.

Italy’s real GDP per capita is now lower than when the euro was launched in 1999, especially when compared to European peers like Germany and Greece, which have seen real GDP rise since 1999.

According to Rosa, the Italian populist movement has rallied behind these statistics as reasons to leave the EU, pointing out that Italians feel “vindicated by those figures” when they say the euro made their country better off.

Furthermore, support for the EU exit could be exacerbated by an inability to periodically devalue the currency as a way of re-gaining competitiveness, the report said.

Rosa noted that despite the euro’s apparent shortfalls, Italians may have forgotten its benefits of a single European currency, such as a lower interest rates and stable inflation, as well as a fall in the servicing costs of Italy’s public debt.

The report warned that while Italians may initially be hesitant 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 “that they 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 as September, the report added, when the new government will need to draft a budget to be sent to Brussels. Should this budget introduce a flat tax system, minimum income policy, or backtracking of the pension system reform introduced by the previous government, Italy may well be headed on a collision course with the EU.

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.