Cyprus Debacle should Boost Gold, Silver Demand in Eurozone & the U.S.
Gold and Silver Prices again face a bout of uncertainty since the Cyprus debacle did not trigger the necessary amount of Bullishness earlier, neither did the last minute deal finalization yesterday provide the potential for a big down-slide.
A rise in Gold Prices amid worries about Cyprus teetering on the edge of bankruptcy was widely expected to renew the need for Gold in times of trouble. The general reaction by markets to the painful bailout accord for Cyprus has been surprisingly subdued as the Euro initially rose but has since given up its gains while Gold Prices sharply declined but recovered from dips. These muted reactions have put markets in an uncertainty zone with complete lack of direction clarity. The Gold and Silver Market awaits fresh direction triggers amid range-bound movements as of now. The April Gold Futures contract is heading towards expiry this week & with options expiration, sometimes you see exacerbated moves. Also, the rollover from the April to June futures is occurring, and some traders may opt to leave the market amid uncertainty. Gold Prices below $1,600 an ounce will be seen as a buying opportunity for most, especially the Chinese. Physical demand for Gold and Silver has substantially picked up this year & has provided the much needed floor to prices but outflows from the Gold ETFs has greatly offset the physical demand. Gold ETF Holdings are down by 45 metric tons in March so far, with continued weakness posing the key downside risk to Gold Prices. Silver ETFs have in fact seen sharp rises in ETF inflows, making it very evident that Gold Investors are only shifting exposure from Gold to Silver. Holdings of Silver ETFs tracked by Bloomberg are now close to a record high. Speculators snapped up bullish positions in Gold last week but the size of the net-longs increase was less intense & momentum is yet lacking.
Cyprus deal instills Fear of a cloned solution to a similar Catastrophe elsewhere:
The Cyprus Bailout deal calls for deposits under 100,000 euros in Cyprus’ second-largest bank, the Popular Bank of Cyprus, or Laiki, to be protected and moved to the Bank of Cyprus. Laiki will be wound down, with large depositors to lose a portion of their assets. Depositors with more than 100,000 Euros at the Cyprus Popular Bank will be wiped out while those holding more than that sum at the Bank of Cyprus will lose 40%. Deposits of less than the EU deposit-guarantee ceiling of 100,000 euros will be protected, but the uninsured depositors at Cyprus Popular are to be ‘largely be wiped out. Small depositors were ultimately protected but the willingness of Cypriot officials to sacrifice them, and for the European officials to have gone along with the plan initially, will always be remembered. The President of Cyprus assured his people a bailout deal he struck with the European Union was in their best interests and would end anxiety, but he also announced “very temporary” capital controls to stem a run on the island’s banks. Cyprus’s rescue plan, which forces depositors and bank bondholders to bear losses, represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region’s finance ministers said. The lucrative offshore Cyprus banking sector is in tatters and its reputation irreparably ruined. The outcome of the Cyprus debacle is something of a disaster for the EU banking system which will now have to suffer another round of damaging bank runs by larger depositors scared about losing their money in a future banking collapse. Fear is contagious & ironically it is that very fear that now might cause another banking failure elsewhere. Banking is a matter of trust and confidence. The fall-out from the Cypriot banking affair is not going to be nearly as easily contained as signing off a rescue might appear to make it. Can EU banks now be trusted as custodians of larger sums of money? Well yes, evidently some can and some cannot. The marketplace will now decide which banks close next.
Just imagine the plight of the people of Cyprus who may not be having enough cash stashed at home to survive the past 10 days when Banks & ATMs remain closed while shops & establishments refused to accept credit cards out of fear of never getting the money from the Bank. This Fear will surely drive many to invest a large part of the paper currency they own into Gold or Silver which is liquid money & without any liability – encashable anywhere at will. People around the world may have learnt a valuable lesson, though a huge price has been paid by the people of Cyprus.
Safe-haven demand on Evaporating Trust on Govt, Banks & Currency to drive investors to Gold & Silver:
Sooner than later the entire banking system is bound to collapse. The Cyprus deal could end up becoming a template for further Banking Debt Crisis solutions. Cyprus is the first of five bailouts in the Eurozone where depositors have been hit. The macroeconomic backdrop that seems bullish for Gold, includes the long-running Eurozone debt saga, loose monetary policy in the US & Japan added to by an expected softening of consumer spending in the US. European depositors are now well aware that they are fair game in the hunt for assets and will likely reshuffle money away from banks domiciled in riskier countries to those in safer ones, making the ‘north-south’ divide even more pronounced and likely worsening the situation of a number of banks. There are widespread fears among Europeans that their bank accounts could be raided in any future Eurozone bailouts. The draconian move on larger depositors will inevitably provoke a run on the banks in other heavily indebted EU nations with fragile banking sectors, namely Spain, Portugal,Greece and Ireland. At the very least depositors will want to split larger amounts to hold no more than 100,000 euros in any single bank.
US Federal Reserve must remain very accommodative because the labor market remains far from healthy despite some recent improvement in the broader economy, said New York Fed President William Dudley, a close ally of Fed Chairman Ben Bernanke.
No new Record for Gold Prices since Sept 2011:
Bloomberg – Gold is suffering its longest run without a record high since the 28-year drought that began in 1980 and only ended in 2008 as the metal struggles to extend the longest bull market in at least nine decades. The CHART OF THE DAY shows prices fell 16 percent from the all-time high of $1,921.15 an ounce set Sept. 6, 2011. The stretch since then is now longer than the period between highs from March 2008 to October 2009. The metal rose above $850 in January 2008 for the first time since the same month in 1980. Gold Bullion as much as doubled after central banks, led by the Federal Reserve, cut interest rates in December 2008 to restore economic growth. Investors sold about 178 metric tons valued at $9.2 billion from gold-backed exchange-traded products since holdings peaked in December amid signs the U.S. economy is improving and as Fed policy makers debated the pace of stimulus. The metal, down 4.1 percent this year, is unlikely to return to the 2011 intraday record, Credit Suisse Group AG has said. Gold has rebounded 3.3 percent since reaching a seven-month low of $1,555.55 on Feb. 21, partly on concern that Europe’s debt crisis may worsen. The Fed said March 20 that it will maintain asset purchases to spur growth. Gold has rallied the past 12 years. At the same time, global equities are up 5.2 percent this year and the International Monetary Fund predicts global growth will climb to 3.5 percent in 2013 from 3.2 percent in 2012.
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