Hedge Greece, Buy Gold

This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

Now is probably not the Golden Age that Greek philosophers envisioned back in antiquity. Nonetheless, I think gold should play prominently in protecting yourself from the fallout should Greece exit the Eurozone.

Bear in mind, my perspective is it’s going to happen. Back in December, in my 10 stock market predictions, I said as much. (See prediction two.)

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Understandably, investors are concerned about the impact this could have on their retirement portfolios and other investments, as well as expressing concerns of the impact on the economy and the global financial system. Here are my conclusions:

1. Equity markets will remain volatile until the European sovereign debt crisis is resolved. This may take several years.

2. 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.

3. Data suggests there has been a flight of capital from Greek and Spanish banks into Swiss Francs. A closer look at European Central Bank (ECB) money movement data reveals that while assets are exiting Greek banks, most have remained in euro currency, primarily invested or parked in Germany, Netherlands, and Luxemburg.

This means that although the impact to Greek and Spanish banks is clearly negative, the impact on the Eurozone as a whole is negligible. This is a classic example of how headlines can cause you to make bad investment decisions. As in this case, the flight of capital from Greece has little real world impact.

4. 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, I do not believe that there is a significant risk of a disorderly default or exit. Rather, I believe all parties will work together to orchestrate a slow, mechanical, orderly exit because while any exit out of the Eurozone will be costly for all, a disorderly exit could be disastrous.

5. If and when the exit occurs, the world will be awash in liquidity. That’s because finance ministers from around the world, including here in the U.S., will engage in massive quantitative easing, to try to stimulate economic activity in their region.

This is where the gold hedge comes in. The global flight to safety will come to a screeching halt at the hallowed doors of the Unites States Treasury, as investors pause to collectively scratch their heads about the meaning of yields at 1.5%, or lower. Lacking conviction in equities, they will run into the waiting arms of gold and silver. For this reason, my forecast for $2,000 gold in 2012 is not off the table. Not by a long shot.

The way for individual investors to play this hedge is through the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV), both of which we own.

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