Gold market report: your bank deposits aren’t safe

Downward price move on chart

Alasdair Macleod – March 28, 2013

The chaos that is Cyprus has mesmerised markets, including for gold and silver. At the time of writing there are signs that markets were beginning to emerge from their hypnotic trance. Bond yields for Greece, Spain and Italy began to rise as it dawned on markets that both large and small depositors were beginning to understand the implications of governments raiding bank deposits to keep the banks afloat.

The Brussels-IMF-ECB axis has been desperate to find a way of not guaranteeing the banks’ solvency, and they have tried to do this in Cyprus’s case by raiding deposits over €100,000. It is expediency over legal rights. In a normal bankruptcy there is a defined pecking order, and in the case of banks, depositors are first to be paid. In the eurozone they are the first to be sacrificed if they are deemed to be “rich”.

This is rich with unintended consequences. Depositors in all other eurozone states have suddenly realised that their deposits are not safe. Why risk hanging around on the basis that your sub-€100,000 deposit is guaranteed? And if you have more than that in the bank you are a fool.

Directors of companies and trustees are now probably guilty of negligence if they leave money on deposit in the eurozone. It is no exaggeration to say that the mishandling of Cyprus could potentially destroy unconnected banks and the euro itself by undermining confidence that the euro is worth more than its cost of production (N.B. this is zero).

Meanwhile the bullion banks have succeeded in reducing their net shorts in the futures markets by persuading hedge funds to increase their shorts to record levels. Even in silver, they have achieved a reduction in their exposure in a market short of physical. Prices have held their ground, with signs of strength in gold on Wednesday after an early morning dip. At the very least, prices are refusing to go lower, which must be disappointing for the bears.

To summarise, the paper markets for precious metals are now set up for a squeeze with hedge funds covering their shorts and bullion banks trying to protect their positions.

The Week To Come

For many of us it will be a four-day week after Easter Monday. The major announcements are as follows.

Monday: US Manufacturing PMI; Construction Spending; ; ISM Manufacturing Index
Tuesday: UK Mortgage Approvals; Net Consumer Credit; M4 Money Supply. Eurozone Unemployment. US Factory Orders and Consumer Optimism
Wednesday: Nothing material
Thursday: Eurozone Producer Prices Index; ECB Interest Rate. UK Monetary Policy Announcement and Base Rate. US Initial Claims
Friday: Eurozone Retail Trade. US Non-farm Payrolls; Trade Balance; Unemployment and Consumer Credit

 

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FinanceAndEconomics

Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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