Logic suggests that gold and silver prices would have received a permanent boost from the economic crisis in Cyprus despite its so-called settlement with some large investors reportedly set to lose up to around 40% or more of some of their deposits.
But what is logical about gold and silver price movements these days? It could still happen, but the propensity for people – even among the supposedly economically-savvy institutional investment and banking sector – to take at face value politicians’ statements that the crisis is over, just boggles the mind, if that indeed is what is truly holding gold and silver back!
OK, so Cyprus bankruptcy and its subsequent enforced departure from the Eurozone, have been warded off for the moment, but at what cost? Will we see a run on other Eurozone banks with big deposit holders looking for safer places to stash their cash? After all a precedent has now been set which could see similar measures imposed on other Eurozone insolvent banks – and in reality virtually all Eurozone banks are insolvent in real terms, and close to it even in banking terms given all banks need to operate on a fractional reserve basis.
Were major holders to withdraw their cash because they feel a bank is no longer a safe place to keep large sums of money, this could force a whole new swathe of banks into major difficulties beyond the power of the financial elite to rescue.
We have already seen an end to the decline in the major gold ETF holdings – a sell-off from which had been under way from the fourth quarter of last year and accelerated in February and March as safe haven investing seemed to be, for some, no longer necessary given strong stock markets – a move exacerbated by news that some mega investors, notably George Soros and Louis Moore Bacon, had reduced or eliminated their holdings in Q4.
The gold price suffered accordingly although it is interesting to note that central bank gold purchases have been continuing during the early months of this year, and are expected to remain a significant factor in gold demand. But in the past week or so the largest gold ETF, SPDR Gold Shares (GLD) has recorded inflows again, in part as safe haven investing has again come to the fore given the Cyprus bank deposit ‘haircuts’ – or ‘legalized theft’ as some like to call it.
While official figures suggest that the U.S., in particular, is beginning to pull out of recession (although others discount official data as manipulated and misleading), and China seems set for a soft landing, Europe remains a mess with Cyprus perhaps the tip of the iceberg. There are other countries that could yet face the Cyprus treatment in terms of a bailout, particularly if the Cyprus ‘solution’ starts generating bank runs, which is highly possible.
Pick any one of Slovenia, Slovakia, Kosovo, Andorra, Estonia, Montenegro, Malta, Monaco, Ireland, Portugal, Greece or mega economies like Spain, Italy, and even France where economic data is going downhill fast, which are all hamstrung in their financial options by their membership of the European Monetary Union (EMU) and operating with an over strong currency buoyed up by Germany and others stronger nations, over which they have no control, and you have another potential Cyprus situation, or worse.
Any major holders of deposits in banks in many of these Euro dependent nations over and above the EU protected level of 100,000 euros will be feeling nervous and some are bound to seek other, safer ways of holding their wealth.
Precious metals, held outside the banking system, might seem an obvious answer here.
So why hasn’t gold moved as a result? Well it has – to an extent. It has pulled back up to the $1600 plus level, but should we say perhaps it is being kept from rising much further by government currency intervention? The last thing the masters of the Euro want to see is a rising gold price when it has to be viewing major bank deposits as vulnerable to being moved from the banks themselves into precious metals following the Cyprus intervention.
It has been interesting to note that since the Cyprus situation blew up, gold and silver have tended to weaken once the European markets have opened – and then picked back up again in the U.S. later in the day – a pattern directly contrary to that which had been seen pre-Cyprus. Gold now seems to be being seen as a currency which needs to be kept in its place more than ever lest a move into it by the big bank deposit holders really precipitates banking Armageddon.
Gold is seen as attractive to many as it bypasses counter-party risk. You can’t print more gold and mining more is severely limited by geography, geology and technology. But you can print money to be used to keep the gold price under control. This isn’t a mechanism designed to push down the gold investor, who is probably seen as immaterial in the scheme of things, but to help try and maintain the pretence that the global economic situation is under control, which it surely is not.
The true gold bugs see controls over the gold price as eventually being forced to cease with a resultant gold (and silver) price explosion. The writer is not so sure, with the current propensity to just print more and more money to stimulate economies, whatever this means in terms of national debt, so why not just carry on throwing money at suppressing gold as a part of this? Whatever the policy, the rulers of the global financial universe perhaps just can’t afford to let the gold price get totally out of control. They may see a controlled rise as an option, but possibly not an eruption.
Fundamentals and logic indeed suggest that gold should see a substantial price increase in the months and years ahead, but it may just not be allowed to happen unless the whole money printing house of cards comes crashing down. Some see this as inevitable, others are not so sure!
Reprinted with permission from CMI Gold and Silver.