The Genie & Gold

March 27, 2013

The ECB, IMF, and EU have let a treacherous Genie out of the bottle last week-end. Their bailout offer to Cyprus included a plan to tax depositor’s savings at the Cyprus banks, or Cyprus can come up with another methodology to make up that bailout amount ($7.5B). In either case, such a plan is to be completed on Monday, or there will be no further bailout monies for Cyprus. The ECB and the IMF have stated that this “depositor’s tax” was a “one-time and one country” situation.

Nevertheless, the precedent has now been set for the future that any central bank (CB) or international agency (IMF) might consider taxing savers to pay the Sovereign debts of their insolvent home country. The “Genie” is now out of the bottle, and it can’t be put back into the bottle…the damage is done. The merits and/or the intent of the plan are not our focus, but there are going to be serious “unintended consequences” as a result, regardless of how the Cyprus situation ultimately concludes.

Cyprus’s depositors aren’t covered by deposit guarantee rules because the state is insolvent, German Finance Minister Wolfgang Schaeuble said today on Deutschland Radio. “The media falsely created the impression that deposits are not safe in other countries,” Schaeuble said. “They are safe, though only on the proviso that the states are solvent.”

The bottom line is that if a saver (or business) is domiciled in a “weak” EU member country, this plan warns that banking depositor’s funds are not safe from taxation (or special fees) within the EU when their home country is under severe financial distress or becomes “insolvent.” Since the “weaker” EU members are current recipients of bailouts, they are technically insolvent right now. This is Catch-22! “They (the deposits) are safe, though only on the proviso that the states are solvent.”

If today’s known distress levels in “weaker” EU members were to suddenly increase, it is reasonable to consider that there might be a “depositor’s tax” sequel to the Cyprus plan, or something else. There most certainly could be bank runs whenever a “weaker” EU member is under duress in the future, because of Catch-22.

“This will be the death knell for an EU Common Deposit Guarantee scheme,” Roberto Henriques, an analyst at JPMorgan Chase & Co. in London, wrote in a report to clients. “With this action, one of the stabilizing instruments will have been completely undermined in the current process and, in the future, we may see a very strong reaction in deposit flows in the event that a banking sector may experience stress.”

Given these realities, why would any wealthy EU saver (or business) in a “weak” country maintain meaningful deposit amounts in that country’s banks (or anywhere else in the EU) since the customer’s country of origin would be readily identifiable and therefore taxable?

It is far more likely that they’ll move their wealth outside of the EU banking system in order to preserve and protect their individual or corporate savings. Bank deposits, in “weak” EU member countries are going to decline going forward making their banking systems even weaker and stunting economic growth. That, in turn, might create the need for more bailouts down the road by the ECB and IMF. What might the ECB, EU, and IMF terms be then?

Of course, now that the Genie is out of the bottle, we can expect a deluge of “damage control” efforts from the ECB, the EU, and the IMF making reassuring statements regarding deposit insurance.

European leaders are working toward a June timetable to set minimum standards for individual deposit guarantee plans at the 27 member states, a key part of the proposals for a banking union that places regulatory authority in the hands of the European Central Bank.

No one knows what that will look like, but the Catch-22 precedent has already been established for savers and businesses in “weak” EU countries should they become “officially” insolvent. The ECB, the EU, and the IMF now control the timing of such “official” EU insolvencies since they have the checkbook, so they are, in effect, more powerful than the domestic government of a “weak” EU member.

Amsel (Amschel) Bauer Mayer Rothschild, 1838: “Let me issue and control a Nation’s money and I care not who makes its laws.”

This unleashed Genie looks like a “Lose-Lose” situation for the entire EU Zone and the Euro in the long-term. Sooner or later, individuals and countries will realize that their national Sovereignty was lost by the pen, instead of by the sword. Whenever that day comes, we expect significant turmoil in the EU Zone.

In our February 4th 321Gold Update MML noted that:

“Our proprietary cycle (PC) had identified the week ending on 9/28/12 ($U.S. 1,774) as a “high zone” week for gold.” Here is what gold looked like at that time (below). In early February, we forecasted a “low zone” for the final week of February for Subscribers based on our PC, sentiment readings, and technical analysis. Would either forecast have assisted you in your gold Trading or Investment positions?

We believe the Cyprus precedent is more important than a Cyprus bailout or default for all the above reasons. The precedent is certainly bullish for Mr. Gold Market long-term, but Mr. Gold Market can do anything this week given this type of news. We suggest for 321Gold readers to let the dust settle, and not chase strength nor sell weakness this week since reacting to such “news” almost always creates an immediate loss.

MML’s cumulative (1½ years) Investor “hedging” profits are $160 per ounce, and our Trader’s profits are now $110 per ounce. Total MML Trading and “hedging” gains are now $270 per ounce, so these results have offset much of the difficult period gold has faced since September, 2011.

Our MML philosophy is the same today as always…never sell your physical gold. Hold the amount of physical gold you are comfortable with, and periodically “hedge” some of it (or all of it) when it is overvalued.

If you would like to review our current MML forecasts for gold and other markets, consider a subscription (details are listed below). In deference to our Subscribers, we have a 4 day calendar “Quiet Period” from all Subscriber Updates before any Posts.


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