Gold to prove crucial hedge against next financial crisis – analyst

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While unsteady financial markets are bouncing up and down due to trade and geopolitical conflicts as well as political uncertainty, some investors turn to less risky assets, principally to gold.

According to the recent report by the London-based consultancy Rosa & Roubini Associates, the latest developments in Italy could easily trigger another global financial crisis. Brunello Rosa, economics expert and CEO of the firm, says that escalation of political risks is likely to force investors to adopt a “moderate risk-taking stance, within a defensive positioning.”

“Gold will remain a crucial component of diversified portfolios, as a hedge against potential corrections across asset classes,” the analyst said, as quoted by Kitco News. He stressed that the precious metal could become a useful asset to hold in a volatile environment. If Italy drops the euro, financial markets will inevitably face falling equity prices, spikes in short-and long-term rates, and a rise in credit default spread premia, according to Rosa.

“Political developments in Italy have catalyzed 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,” he said.

Gold is being widely advocated by financial analysts as one of the major safe harbors for worried investors as the world has to move from an international monetary system dominated by the US dollar to a multi-polar currency system.

“The inherent weakness of this ‘non-system’ is clear, however, which may explain why many emerging market central banks are increasing their allocation to gold,” Dr Andrew Sheng, Distinguished Fellow of the Asia Global Institute, told US numismatic weekly Coin World.

“It is liquid and has neither credit nor default risk. The inescapable conclusion is that the only viable alternative asset for official reserves is physical gold, as it alone has the requisite liquidity, correlation characteristics, and trust,” he added. “Central banks seeking true risk diversification or insurance, therefore, should increase their gold holdings.”

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