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Talks to address the US fiscal cliff — which threatens to hike taxes and slash government spending on January 1 — are shaking up financial markets around the globe. Here’s how you should respond.

It’s easy to get caught up in the alarming headlines surrounding the fiscal cliff, but investors should take the long view and stick to the fundamentals, according to two leading investment experts. 

“I see continued stock market volatility in the next month,” said Canadian financial author and newsletter publisher Gordon Pape in a November 29 phone interview. “Investors are paying close attention to what they’re hearing from Washington. And what they are hearing is greatly influencing the stock market. December is normally a quiet month, but we could see volatility along the lines of what we normally see in September or October.”

Pape thinks that eventually Democrats and Republicans will hammer out a deal because neither side wants to be blamed for triggering a recession. But “the longer they dither, the more damage they’ll do.”

So how should investors respond? “This is a good period for opportunistic investors to take advantage,” said Pape. “If you have a good-quality stock you want to buy, hold off until we get a really bad day and its price falls for no other reason than the market itself. When a deal is in place after the new year, things will likely settle down, and that opportunity will disappear.”

Gold set to soar; challenges ahead for Canadian oil stocks

As far as commodities go, Pape feels the current situation will have little long-term impact. “I’d be watching what goes on in China just as much as I would Washington,” he said.

The big winner in the next 12 months? Gold, said Pape. “I see gold hitting $2,000 in the coming year, but that has more to do with the policies of the US Federal Reserve. Its quantitative easing program — which is essentially open ended — will likely devalue the US dollar, and gold and the US dollar tend to move inversely. As well, banks around the world are boosting their gold reserves and production isn’t keeping up.”

He sees gold bullion or exchange-traded funds that track the price of gold, such as the SPDR Gold Trust (NYSE:GLD), as the best ways for investors to profit from rising gold prices. Among gold stocks, he likes Franco-Nevada (TSX:FNV,NYSE:FNV) because it earns royalties from gold production and does not assume any exploration or development risk.

Canadian oil producers, however, are likely to continue to be hobbled by tight pipeline capacity, which is forcing them to ship their products by rail — a more expensive option. “I’m not bullish on the Canadian oil sector for at least the next year,” he said. “We really need a release valve, and Keystone XL is still years away — if the Obama administration approves it.”

Refiners in the sweet spot, says US investment expert

Robert Rapier, editor of the Energy Strategist newsletter in the US, agrees with Pape that fiscal cliff talks will likely have little lasting impact on resource markets. Rapier’s publication focuses mainly on the oil and natural gas sectors.

“The president doesn’t really have a lot of impact on oil prices and there’s little that Congress can do, either,” said Rapier in a November 29 phone interview. “If they fail to get a deal on the fiscal cliff, that could trigger a recession, which would obviously be a big negative for oil prices. But I expect they will get a deal done. They’ll push it, but it will get done.”

“In any case, I see oil prices continuing to soften in the near term as we move into an oversupply situation,” said Rapier. However, there are still ways for oil investors to profit, even in that environment. He sees leading refining companies, for example, as well positioned for gains. “When oil prices fall, gasoline prices typically don’t decline as quickly,” he explained. “Refiners profit from that gap, known as the ‘crack spread.’”

As a result, said Rapier, we should see strong results from US refiners like Valero Energy (NYSE:VLO) in the coming months.

Developing world demand still favors oil producers

In the long run, though, he still likes oil producers, mainly due to demand from China and other developing markets, which he feels will continue to grow strongly and support prices, no matter what happens with the US. “Years ago, US demand largely dictated oil prices, but that’s no longer the case,” he said. “We’re now a much smaller part of the equation. In the past few years, US demand has actually been declining, yet prices continue to rise.”

 

Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.

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