I suppose some folks are still sitting back watching this Greek tragicomedy unfold while believing the endless hope-ium filled headlines that vacillate wildly on a daily basis.  Well, I am not fooled.  Does it seem the Euro may have been designed to fail?  Regardless, we can simplify the outcome to two possible scenarios.  And then we can ask the question, how do I invest for either scenario and protect my wealth regardless of the outcome?

First, let's take a look at the two likely scenarios.  Greece either defaults and they declare the banking system insolvent and restructure, or the European Central Bank and Federal Reserve print enough money to kick the can far enough down the road to buy some more time to deleverage and, hopefully, re-cap the banking system.   The first scenario out of Europe – the default scenario – places a large amount of losses on the elite.  It circumvents austerity measures (which are starting to sound comical), it causes massive wealth destruction right away, and it throws the global financial ponzi-system into systemic crisis.  The second scenario is an exercise in balance-sheet expansion between the ECB and the FED.  Basically, the central bankers start printing, QE-ing, stimulating, MBS buying and monetizing.  Debt and balance-sheet expansion and the like put the losses on the middle and lower classes and future generations.

If I were a gambling man, I would bet on a default first followed by a very quick and “necessary” (according to the bankers and politicians) bailout with taxpayer funds.   That allows the elite to buy assets for cheap with taxpayer money.  Sound familiar?  But predicting the eventual outcome is an exercise in futility, and investing based on the possibilities is frustrating and confusing.

So is there an investment that doesn’t care and will protect you in either case?

Yes, gold.

Why is Gold a win-win regardless of whether Greece defaults, the Euro zone’s banking system fails, or whether the ECB and the central bankers print more money?   Because gold is real money.  Gold likes chaos.  Gold likes politicians who are losing more and more credibility.  Gold loves financial fear and systemic crises, and gold loves debt accumulation and balance sheet expansion.   If and when the banking system fails, the powers that be will have to save it somehow.  So either sooner or later (before default or after) the printing presses will be shifted into overdrive, either physically or through some crooked financial game with a fancy name made of capital letters that almost no one understands.

Heads I Win, Tails You Lose

First, let’s look at the kick-the-can scenario, because that’s the most simple situation to understand.  In late 2008 around election time, the US has a debt problem that was $8 trillion deep.  Gold was $850/oz.  Less than 4 years later this country is struggling with a debt problem that is $15.5 trillion deep, and gold is $1,750.  The increase in US Treasury debt in the last 4 years was an increase of 94%.  The increase in gold over the same time period… 105%.   The parallel between the price of gold and the addition of US treasury debt is obvious.  It should also be obvious at this point (and if you heard the last FED FOMC meeting) that the FED and the ECB are out of ammunition, save for a contest of whose balance sheet is bigger.   The take-away is that can kicking is simply debt creation and balance-sheet expansion, and that is by definition a debasing of fiat currency and the impetus for higher gold prices.  Gold is the currency of central banks.  They hold gold to hedge the fiat currencies and all the (toxic) paper they hold.   Central bankers know when they will accumulate debt and they know when they will print.  That’s why they have been net buyers of gold for 6 years.  If they kick the can real hard, gold will react to the upside.  It always has.  For a chart of what gold does alongside central bank balance-sheet expansion, look at a chart of gold for the 6 months following QE1 and QE2.

The second scenario is much uglier.  It looks like 2008 when Lehman Brothers failed among other bad things.  2008 was a deflationary spiral, and deflation hurts.  But wait… doesn’t gold like inflation, but not deflation?  Not so fast.  Gold doesn’t really care about either.  We presently have deflationary pressure being fought with central bank balance-sheet expansion and debt creation (stimulus).  We actually have stagflation, the rising cost of things you need, a falling price on non-essentials, no wage growth and no economic growth.  So we get bouts of both and the central bankers fight them with policy.  A full implosion of Europe or Greece will feel similar to 2008, albeit possibly much worse.  I don’t have detailed data on exactly how exposed our shadow banking system is to a Euro crisis, but I would have to imagine it’s BIG.  So let’s look at what gold did in 2008.  Initially, as everyone ran for dollars, gold fell along with everything else,  but by much less.  By year's end, however, gold had RISEN in value by 8% while everything from real estate to equities to used cars had dropped by 30%.  Again, money will flow to gold in an ultimate “risk-off” strategy, even though the powers that be have done a decent job of making it look like a risk-on trade over the past few years.  Assuming money eventually stops moving to US treasuries for protection – and it has to – any financial crisis will be great for gold.  Where else does the money go?  A Greek bank in Euros?  Italian bonds maybe?  Maybe an account with MF Global?  No, none of the above.

The Ultimate Wealth Preserver

Things are seemingly losing their value structure or “money-ism” all around us.  Clearly, based on treasury rates, US debt still has the perception of safety, but for how long?  Gold loses its “money-ism” last.  It has outlasted every paper currency every created by human beings.  So we either continue status quo and gold steadily rises while the dollar is steadily debased, or we go through another deflationary spiral and gold loses less than anything else and ultimately, as it has for 4000 years, preserves ones wealth better than anything else.

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