By Forex Traders

We are now entering the third year of the ongoing saga of the European debt crisis, a multi-act Greek tragedy that refuses to leave the global stage.  Countless articles have been written about how and when this so-called “crisis”, which is supposed to mean a situation that has reached a critical phase, will ever resolve itself.  Germans seem entrenched and refusing to share their export largesse derived from a currency weaker than their former Deutschmark, and government officials appear bent on papering over the problem by issuing more bonds.

A host of summit meetings have been scheduled for 2012 to arrive at some sort of compromise, but the uncertainty of the outcomes has resulted in levels of volatility not seen in our financial markets for several years.  There is, however, a deadline on the horizon – massive amounts of existing Greek debt must rollover in the months to come, and some agreement must be reached with current debt holders before any other actions can take place.

Under these conditions, what is an average investor to do?  Many investment managers have counseled their clients to withdraw and remain liquid, ever vigilant to pounce on obvious bargains that appear in the market.  The question remains – what will happen if and when a true Greek default occurs?  Stocks, commodities, and currencies will absorb a shockwave, as many analysts have suggested, but what will that look like?  Let’s start with where we have been over the past year, as depicted in the chart below:

ETF correlations for the past year can provide us with a general view of what has recently transpired.  Returns for Gold, Silver, Platinum, and the S&P 500 index are displayed for the previous twelve months, along with the track record for the “EUR USD” currency pair, our most heavily traded forex combination.  Gold and Silver were the obvious winners in a year when then global economic recovery stalled as Europe dropped deeper into their “deficit pit”.  Corrections and consolidations followed, but a steady release of favorable economic data in the U.S. signaled a late rebound in all categories.

Platinum was the “laggard” of the group, but, if Copper and Coal returns had been shown, then similar lines would have followed Platinum, all three being industrial metals that depend more on an economic rebound than do Gold or Silver, perceived as storehouses of value by most of the investment community.  In case of a Greek default, how will these various lines shift going forward?  Here are a few comments:

• Stocks and commodities are more volatile than are currencies, one conclusion that can be drawn from the above data;

• The anticipated “shockwave” will tighten credit markets and drive capital to “safe havens”, the same effect as happened back in May of 2010;

• Under this scenario, Gold, Silver, and the Dollar will appreciate in an immediate fashion, as demand goes through the roof.  Platinum may benefit, too.  Experts in the currency world have already forecasted Euro parity with the Dollar as a likely outcome;

• Stocks have reached a plateau, of sorts, in current valuations.  Some analysts may contend that the market has already factored in a Greek default, but the event will ignite selling.  If the analysts are correct, then a quick rebound will occur.

Timing will mean everything going forward.  European officials are attempting to stretch out the default process to dilute its impact, while Bernanke and the Fed are prepared to react if the current economic recovery stalls once again.  Stay liquid is the best advice under these uncertain circumstances.

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