Investors would need to keep at least 10 to 30 percent of their portfolio in physical gold to preserve their wealth when money starts losing value amid expectations of further stimulus measures from major central banks, according to Juerg Kiener, Managing Director and Chief Investment Officer of Swiss Asia Capital.
The U.S. Federal Reservewraps up its two-day meeting on Wednesday and the European Central Bank (ECB) meets on Thursday. Traders are betting on action by the ECB after President Mario Draghi said last week that the bank was ready to do whatever was necessary, within its mandate, to save the euro. On Friday, German Chancellor Angela Merkel and French President Francois Hollande said in a joint statement that they too were prepared to support the euro zone.
This will likely come in the form of bond buying and such injection of liquidity would hurt purchasing power, said Kiener, who expects stimulus measures “within the next six weeks.”
“Because the purchasing power of money is being totally destroyed during the monetization period, and if you look at the last few monetization periods, the purchasing power of the dollar lost about 30 percent,” Kiener told CNBC Asia’s “Squawk Box”on Monday. “So if you lose 30 percent within a short period, a 30 percent of something which preserves your purchasing power is actually equalizing your losses on the rest of your portfolio.”
Stocks ended Friday higher on Draghi’s comments after starting the week gripped by worries that Spain would need a full bailout. Yields on Spain’s 10-year government bonds dropped the most in seven months to 6.74 percent, amid speculation the ECB will accelerate efforts to ease the region’s sovereign debtcrisis.
This shows that markets are expecting “fairly strong” action by the ECB, according to John Noonan, Senior Forex Analyst with Thomson Reuters in Sydney.
“The market is definitely pricing in a fairly strong action, certainly pricing in the ECB buying in the secondary-market Spanish and Italian bonds to keep those yields down and the (European Financial Stability Fund) coming in at the auctions themselves to also help out,” Noonan told CNBC. “I think they’re (ECB) going to be printing money like it’s going out of style at some stage.”
He said the ECB would like yields to decline to about 5.5 percent at least in the short term.
The Federal Reserve, on the other hand, may not embark on new quantitative easing this week, even if the U.S. economy is showing signs of slowing down, having expanded 1.5 percent in the second quarter compared to 2 percent in the first quarter. The Fed are focusing on domestic problems now and want to keep ammunition to battle looming tax and spending issues, according to Tony Farnham, Economist and Analyst with Patersons Securities in Sydney.
“Everyone is waiting to see what happens with the (presidential) election (on November 6) and following from there, what ability and capability they have to go out and push back the so-called fiscal cliff,” Farnham said. “So I would believe that the Fed at this stage would not be wanting to use what bullets it’s got left on events overseas when it looks on his own turf and it’s got a few issues there.”
The fiscal cliff is when a host of tax cuts expire and automatic spending cuts go into effect at the end of the year. President Obama and his fellow Democrats have proposed extending the tax cuts for everyone except those making more than $250,000 in annual income while Republicans advocate extending the tax cuts for everyone.
Former Treasury secretaries Henry Paulson and Robert Rubin warned last week that if Congress could not agree on these issues by the end of the year, the tax increases and spending cuts will have dire consequences for the U.S. economy.
— By CNBC’s Jean Chua.