In the summer of 2008, there were ominous signs for the financial markets. Yet it was only a few savvy investors, like John Paulson, who understood the implications — as well as how to make a fortune.
Could we be headed for a repeat performance? Perhaps. On Capitol Hill, things look increasingly dicey. A default on the U.S. debt would likely shock markets and perhaps result in a global recession. With a deadline of Aug. 2, the clock is relentlessly ticking. In fact, there is talk that Moody’s (NYSE:MCO) may soon put our federal debt on review for a possible downgrade.
However, this isn’t the only issue. Italy is now coming under intense pressure, as interest rates skyrocket and the stock market plunges. The credit-default swaps have also spiked, which is a sign of a possible default.
The problem is that a higher cost of capital could stunt economic growth, which is likely to make the European debt crisis even worse. Keep in mind that Italy is the third-largest economy in Europe.
In light of these risk factors, the possibility of the U.S. seeing a stronger second half of the year is looking a bit iffy. Besides, many top economists have been far from perfect on their economic forecasts.
So what can investors do? For the most part, it’s still important to have some type of hedge in your portfolio to soften the volatility. I believe an effective one is gold. This can be done with the SPDR Gold Shares (NYSE:GLD) exchange-traded fund, which essentially has physical holdings of gold and there is substantial liquidity. The expense ratio is also a reasonable 0.4%.
Gold is becoming a global safe haven for uncertainty, and even if the issues get resolved in the U.S. and Europe, it still makes sense to have a position in this precious metal. Unfortunately, it is a good bet that financial and economic crises will continue to be common events.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.