Sure, part of the slide could have been a result of continued profit taking from last week’s run up, but a part of it can attributed to fears about the progress, or lack thereof, of the European debt solution.
Volatility increased again, with the Dow trading in a 300 point range, while the markets remain stuck in the middle of their 2-month sideways pattern, which I discussed yesterday. Concerns about an economic slowdown in China did not help matters, as the Shanghai Composite Index hit a new low for 2011, which gives it a loss YTD of -14.8%.
Still, most of the selling was Greece related, and the effect a default might have on the solvency of Europe’s banks.
There is much guesswork, but no one really has a specific answer as to the overall consequences on the various financial centers not only in Europe but around the world. The fear is that a default might occur in such a way that banks may not have enough time to prepare in order to withstand the shock.
Commodities slipped again with copper taking a major beating, while gold and silver retreated as well. Right now, it seems that any equity selloff includes the metals as well, which has taken the starch out of our core holding in PRPFX, and it no longer seems to offer the safe haven that it did since June of 2009.
While our holdings in PRPFX have been reduced to about 33% of portfolio value, I have no issue discarding the balance should this weakness continue, as we seem to be heading further down the road into unchartered territory.
If Greece defaults, my opinion in the past has been that gold might be one of the beneficiaries and offer a place to hide during times of turmoil. However, last week’s events made me reevaluate my viewpoint, and I can no longer be sure of it.
Right now it appears that if the markets feel more stress from the European debt crisis, the best course of action will be “all cash.” I can see us heading in that direction, possibly very soon, as we have always done in the past 20 years, whenever a bear market started to materialize.