It’s been three weeks since Cyprus caved to the EU and allowed deposits to be attached without so much as a court order. We still don’t know what percentage will be confiscated with respect to accounts that hold more than 100,000 Euros, and it may be a month or two before we do. In fact we may never know because the IMF and EU are desperately hoping that the whole mess will simply blow away in a summer breeze. The IMF is trying to do damage control and make everybody believe that the confiscation of private accounts, now known as a bail-in, was a one-time thing. Unfortunately I don’t believe that. The spreading of bail-in being written into Canadian law, New Zealand law, as well as in other countries, tends to indicate that what has been done in Cyprus is in fact a test case for further application.
I have a very difficult time believing that Fed Chairman Bernanke and ECB President Draghi didn’t have a hand in the formation of such a policy. I do however believe that they didn’t want it rolled out for public consumption in Cyprus. Why pull out such a big and dangerous gun for a relatively miniscule problem of US $13 billion? It makes no sense what so ever. What’s so dangerous about the Cyprus solution? The only thing that supports a fractional reserve banking system like we have in the US is confidence. The banks at best only have 10% of their depositors’ money on hand. The rest is invested, loaned out, or simply gone with the wind so a crisis of confidence would produce a run that would bring down even the best bank in a couple of days.
Mr. Bernanke has just spent more than US $7 trillion to shore up an ailing US financial system, i.e. restore confidence, and the last thing he wants or needs is for someone to question that confidence. For more than a year I have been following the velocity of money, the speed with which a dollar moves through the US economy, and as you can see in the chart below, it’s at an all-time low:
I have always attributed the decline to the fact that Bernanke was shoveling money into the purchase of toxic, non-productive assets, but now I am beginning to wonder if the sharp decline is also the cause of smart money simply leaving the system in anticipation of a Cyprus moment in the US!
The decline in the velocity of money is serious business as it implies a significant deflationary event is about to take place. Furthermore it is no fluke, or a “one-off” event, as the money multiplier also made a new all-time low just last month and has turned down yet again:
We already know that quantitative easing has not produced sustainable economic growth and we recently saw that unemployment hasn’t improved so Bernanke cannot afford to have the credibility of the banking system called into question. Unfortunately the market usually gives you what you can least afford, when you can least afford it.
Finally, I do not think it was a coincidence that gold tested the lows right as Cyprus was unwinding and bounced once it became known that individual accounts were no longer safe. The fact that the US government tells you your accounts are safe, or they won’t touch your gold, is meaningless because they already took your gold in 1933! They have a precedent and they will not hesitate to act. They will make an announcement on a Sunday night and on Monday morning your gold, and your accounts, will be cleaned out. With respect to gold you can see that it tested the support connecting the two highs from 2012 (dashed blue line) and then bounced. We are continuing the move higher today as the spot gold is up 10.60 at 1,583.80 and has traded as high as 1,586.20 this morning. So on Monday as well as today we’ve seen higher highs and higher lows and that is bullish.
I remain 100% convinced that the lows are in and gold is finally “off to the races,” and silver is close on its heels:
Silver held its support at strong 26.82 and this morning is up 58 cents at 27.88. In conclusion gold and silver are the only place to be and I will go so far as to say that you will not see 1,550 gold or 26.75 silver for years to come, and maybe never again! If you don’t own them, now is the time to buy before the train is too far from the station. The smart money knows what’s coming, and now you do too.