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European Default Inevitable -- Sell Your Gold?


At a time when uncertainty and confusion is normal and gold is considered a solid safe haven, the risks to the average investors are hidden.

Yes, that's what the title says -- massive default inevitable, sell your safe haven!

Every other day the market swings widely based on rumors out of Europe, "Greece will default soon," markets down three percent; "German vote promotes confidence in Union", markets up three percent. It has actually become predictable volatility. The simple fact is that Greece will default. The questions that remain and that are of the utmost importance are: Will the default spread across Europe like the black plague? Will it freeze markets like the dark days of 2008 Lehman Brothers? What affect will it have on your money, your investments?

Credit default swaps for Greek debt are pricing an almost certainty of default. Greece's short-term bonds are yielding over 50%.The country is laying off public workers, selling islands, and has no solid growth plan. Greece is in a depression and will do what it has always done -- default. Logically, Greece has taken away so much from its people that very soon enough will be enough -- the people will scream for an exit from the Union and the currency.

However, the specifics of this issue are not what has the global markets fearful, but rather the repercussions of the Greek default on the other debt-ridden countries of Europe and the European Central Bank (ECB). A Greek default may be containable by the ECB, but if the fear and the defaults are large enough, countries like Portugal, Ireland, Italy and Spain may also default. The backstop for these countries alone would be in the trillions and therefore unstoppable. The domino effect would be catastrophic -- first-world countries in Europe would be in immediate recessions and growth would be only a dream.

Under the assumption that the worst case scenario is averted and they can contain a Greek default, what are the ramifications of their defenses?

The ECB has essentially been the lone backstop for the financial problems of the Union. They have purchased just under $100 billion worth of EU nation's bonds and lent out over $400 billion to their nations and their nation's largest banks. They have collected any collateral to justify the loans, including Greek government bonds. In the event of a Greek default they will lose the collateral and be forced to return the bonds to the European banks, and these banks will be forced to pay back over $400 billion. This could essentially bankrupt the ECB, which would be forced to look to the wealthier countries of the Union for help. For example, Germany would be asked to help provide liquidity to maintain the solvency of the ECB. Their liquidity would in part be supplied by over 3,400 tons of gold that they hold. (See, "It's the Economy, Dummkopf!" in Vanity Fair.)

3,400 tons of gold to provide liquidity! That is an eye-opening revelation that will buck the current trend. The rise in gold (GLD) has been historic; the world has been scared and has looked for safety. See for yourself -- they have driven US bond yields down (TLT), silver prices up (SLV) and other safe havens such as the Swiss currency have increased. Investors have flocked to these investments as world growth estimates have fallen and the smell of a double dip recession becomes more pungent. An investment into gold makes sense during another major financial crisis, right?

If the hypothetical scenarios foretold play out, the safe-haven-seeking investors will be in for a surprise. They are going find the prices of the shiny metal off their highs and may be convinced it is now a perfect time to buy. But this move off the highs may be a prophesy of a coming default of Greece. Has Europe already begun selling some of their holdings to prepare for a Greek default? Will they be forced to sell all their holdings to prevent an insolvent ECB?

At a time when uncertainty and confusion is normal and gold is considered a solid safe haven, the risks to the average investors are hidden. I fear that many investors will flock to these commodity markets looking for safety and will be surprised to find a very large seller in the form of the European sovereign nations. My firm suggests staying protected in your current positions or waiting for strength to return before entering new ones with a risk state that shows as "Above Normal."

Today my firm shows shows optimized short-term potential exits or hedge triggers at $153.49 and long term at $148.16:

See Part 2 of this article here.

Editor's Note: For more, visit

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