NEW YORK (TheStreet) — You can’t really blame Greek (and now, I understand, Spanish) citizens for withdrawing their money from domestic banks and depositing their euros in banks on the northern half of the continent.
After all, if they leave their money in local banks, it could be seized (remember what happened to Johnny Depp’s character in Blow), converted into a new and dramatically devalued currency, or worse yet, it could simply evaporate in a freeze of their countries’ banking systems.
The capital markets reflect this uncertainty. A recent auction of two-year German zero-coupon bonds had a yield to maturity of 0.07%. That’s not 7% with a decimal out of place. That seven basis points.
A similar Spanish issue paid 4%, while a similar Greek issue paid 6%. So keen are European investors for safety that the German government can borrow money almost for free.
Keep in mind I am on record in a series of predictions for 2012 that Greece will exit the eurozone. I believe it will happen, but I also tend to believe the exit will be orderly.
Nevertheless, investors here and abroad should protect themselves against the inevitable spasms in the world’s debt and equity markets that will accompany that event.
The hedge that I believe will cover you: gold and silver.
Here’s how I get to that conclusion. When the Greeks exit the EU, there will be a global flight to safety. When investors come to grips with the true meaning of a 1.5% yield on U.S. Treasuries. there will be a collective pause. With no conviction or stomach for equities, investors will buy gold and silver. For this reason, my forecast for $2,000 gold in 2012 is not off the table. Not by a long shot.
There are many ways to own precious metals. I believe the best way to own gold and silver are through the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV), both of which we own.
Once you are properly hedged, here are some larger, related items to keep in mind:
Equity markets will remain volatile until the European sovereign debt crisis is resolved. This may take several years.
Despite added volatility and investment risks, there will be periods when the broader markets will rally on optimism. This will provide astute investment managers ample entry points into the market that could translate into significant investment gains over time. For a precedent, think back to February and March 2009 – few were comfortable with the market volatility, but those that invested have benefited from a 120% run-up in the S&P 500 index.
Assuming that Greece and the rest of Europe cannot come to a mutual agreement and Greece begins talks about an exit, it will take time. Accordingly, we do not believe that there is a significant risk of a disorderly default or exit. Rather, we believe all parties will work together to orchestrate a slow, mechanical, orderly exit, because everybody realizes that a disorderly exit could be disastrous.
If and when the exit occurs, the world will be awash in liquidity. That’s because central banks around the world, including the Federal Reserve, will engage in massive quantitative easing, to try to stimulate economic activity in their respective regions.
