European-Mess-iStock_000017381398XSmallThe crowd is getting very restless. It wants all the nonsense in Europe to end so normal trading can resume, robot to robot, day trader to day trader, no investors welcome, and so those houses for sale in the Hamptons are within reach again.

Sorry. They do not play baseball — at last not well — over there; that may be their biggest failing.  If the European crisis were a baseball game we would be in the second inning. The end game is not the next Greek election, the next bailout payment or the failure to deliver the next bailout payment, the re-negotiation of the Merkel-Sarkozy agreement that will not be called a re-negotiation, even the Greek exit from the euro is only inning three in the crisis.

The failure of Greece to stay in the euro – more importantly, the failure of European political leaders and bankers to respond in anything remotely resembling a timely fashion — is the larger issue for markets that is going to make this ball game go the full nine innings. I find it fascinating that a physicist – Angela Merkel of Germany – has failed to understand that time is not an independent variable in a financial crisis. If you read any one of the several million books and articles written about Lehman Bros. and the crash, the great common denominator linking Bernanke, Geithner, Paulson and within a reasonable time frame, congressional leaders, was time. We would all be on bread lines if the Tea Party types were in Congress at that time or Boehner was Speaker of the House, but that is grist for another mill.

Europe’s crisis plays out, in time

Back to time. The Europeans are politically and institutionally incapable of acting in a timely fashion even if the two or three people over there who see the need had something to say that was heard by those in power. And for this reason, the crisis is going to play out over an extended period of time.

  • Greece fails in some fashion.
  • The recession deepens.
  • Banks almost fail and are bailed out in some fashion.
  • The recession deepens.
  • Greece leaves the Euro, the Greek banking system fails.
  • The recession deepens.
  • Bank problem spread across Europe, resulting in a state-led recapitalization of the banks.
  • The intensity of the recession in middle and northern Europe, and Britain, peaks.
  • I visit Greece — it is now dirt cheap.
  • The smoke clears, European governments now own healthy chunks of their banking system and the European Central Bank (ECB) has created two or three trillion dollars in liquidity to tide the Continent through the crisis.
Moves to metals

And what happens as this game progresses? The panic traders stop liquidating all positions and turn toward gold and its cousin, silver. The inflation traders realize the ECB is going to print a lot of money and turn to gold. The currency traders trash the euro, it hits a buck and positions are hedged with gold. Central banks around the world dump euros and buy some gold.

You can see a pattern here, right?

Yes, gold is on the downswing and so is silver, not trading down 45% or more since its high less than a year ago. It’s a perfect time to look at shiny metals. I am not a gold bug – gold has no more value than the dollar (except on a second date and wedding anniversaries) except in how it is perceived. Silver? Well, silver moves with that perception, but silver is also used in electronics and medical treatments.

Still too dodgy to buy? If you buy silver today, in the form of the silver ETF, the  iShares Silver Trust (SLV), it will cost you around $26.75. You sell a call for the next month’s strike price one dollar above where you bought it – in this case that would be $27. If you get called out, you make 4.9% in a month. If you do not get called out, you do it all over again, averaging down your position.

Yes, the crowd is restless. It wants the European nonsense to end. Why, 4.9% in a month is a lot of money.

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