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Greek Drama: The Final Act Approaches

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Could it be that Greece’s Great Unraveling is finally at hand? I know, I know. We’ve heard so many “sky is falling” stories about Greece in the past several years, one is justifiably tempted to pay the matter no heed. If Greece were going to default, wouldn’t they have done it by now?

But it would be a mistake to think there will never come a day of reckoning. And that day does seem to be approaching fast. Could it happen this week?

Might the European bond rout be a key “tell” for what’s about to happen in Greece? 

You might recall, it wasn’t that far back (not even two weeks ago) that Bill Gross (Janus Capital) raised eyebrows with his now-famous/then-cocky-sounding declaration that German bonds represented “the short of the century.”

I expect Mr. Gross is doing quite well these days. German bonds have fallen dramatically (yields have skyrocketed) since he made that cocky-sounding pronouncement. As one person (Franck Dixmier, chief investment officer for European fixed income at Allianz Global Investors) put it, “It’s as though QE disappeared—it didn’t exist.” (QE being Quantitative Easing, the massive bond buyback project of the European Central Bank, designed to boost inflation and spending by flooding the market with cheap Euros.)

Gold has also been trending higher over the past week. In fact, gold rose nearly half a percent on Friday, at the same time that the U.S. stock market rallied sharply. Usually, gold and the Dow Jones Industrial Average travel in opposite directions.

In a recent Forbes.com article, Raoul Ruparel asks What Has Caused Europe’s Bond Rout? He lists several possible answers but doesn’t even mention the most obvious one: Greece will soon default. Among European countries, the two largest holders of Greek debt are France and Germany. The German 10-yr Bund has been among the hardest-hit bonds.

The German Bund falling; gold rising. Could it be someone knows something?

For a variety of technical reasons, IMF loans are arguably the most “forgiving” to default on, so some would say if and when Greece defaults, it will begin with an IMF obligation. There will be attempts to stem contagion, but it doesn’t take a rocket scientist to understand that when Greece unwinds, you don’t want to be holding anything but gold. (Much of the impact of a Greek default will be absorbed by Germany and France. It will send bond yields even higher, as those countries have to pay investors more to accept the risk of holding French or German debt.) U.S. stocks are safe over the long term but would certainly get whacked in the initial panic phase of the Great Unwind, since markets hate uncertainty. Gold (alone) represents certainty.

It’s getting late. Do you know where your money is parked?

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