Gold, silver mesmerized by Cyprus ordeal

The chaos that is Cyprus has mesmerized markets, including 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 yesterday 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 alliance between Brussels, the IMF and the ECB 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 of more than €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 realized that their deposits are not safe, and 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.

Meanwhile in precious metals markets the bullion banks have succeeded in reducing their net shorts in the futures markets by persuading hedge funds to increase their short positions 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 summarize, the paper markets for precious metals are now set up for a squeeze with hedge funds covering their shorts and bullion banks try to protect their positions. Perhaps this will be the agenda in coming weeks.

Next week

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

Monday: U.S. Manufacturing PMI, Construction Spending and ISM Manufacturing Index.

Tuesday: U.K. Mortgage Approvals, Net Consumer Credit, M4 Money Supply, Eurozone Unemployment, U.S. Factory Orders and Consumer Optimism.

Wednesday: Nothing material

Thursday: Eurozone Producer Prices Index, ECB Interest Rate, U.K. Monetary Policy Announcement and Base Rate, U.S. Initial Claims.

Friday: Eurozone Retail Trade. US Non-farm Payrolls, Trade Balance, Unemployment and Consumer Credit.

About the Author
Alasdair Macleod

Alasdair Macleod is head of research for GoldMoney. He also runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. He has a background as a stockbroker, banker and economist. He can be contacted at Alasdair.Macleod@GMYF.org and followed on Twitter @MacleodFinance.

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