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Cyprus Banking Crisis and FOMC Statements

Release Date: 
Friday, March 22, 2013

Gold and Silver Prices:

Gold moved above $1600 this week, driven principally by the continuing banking crisis in Cyprus and statements from the Federal Open Market Committee (FOMC) affirming the Federal Reserve’s commitment to quantitative easing. Despite some intra-week gains, silver settled lower for the week, largely due to profit taking on Friday.

At Friday’s New York Spot Market close, gold was $14.70 higher for the week, settling at $1,610.20 per ounce while silver was $0.05 lower, closing at $28.86 per ounce.

Cypress Banking Crisis:

The Cyprus banking crisis dominated financial news this week. Facing economic collapse, Cyprus proposed to tax bank deposits to raise €5.8 billion as part of a bailout agreement reached with the EU and IMF. Following massive protests both internally and abroad, the Cyprus Parliament rejected the proposed bank tax, forcing Cyprus to seek other forms of financing.

Euro finance ministers proposed closing two of Cyprus’s largest banks, splitting deposits between “good” and “bad” banks. Those depositors with uninsured accounts would move to the “bad” bank where they could potentially lose 40% of their deposits. (“Euro Finance Heads Said to Weigh Closing Two Cyprus Banks,” Bloomberg, 3/22/13.)

PIMCO’s Co-Chief Investment Officer told CNBC the bank bailout raises issues of "sanctity of bank deposits in Europe… Europe lit the fuse of two sticks of dynamite on Saturday.... they are risking social unrest, political disorder, and an exit from the euro zone." (“Cyprus Bank Tax Lit 'Two Sticks of Dynamite': El-Erian,” CNBC, 3/18/13.)

FOMC Reaffirmed Commitment to Quantitative Easing:

Investors considered Tuesday’s FOMC statement affirming its commitment to quantitative easing to be bullish for gold. The FOMC stated, “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (FOMC Press Release, 3/20/13.)

“’We may have seen some technical momentum gathering ...but we are generally seeing a lot of arguments in favor of gold today, with the Fed reiterating they will continue their quantitative easing and the uncertainty in Cyprus,’" a Commerzbank analyst told CNBC. (Gold at 4-Week High on Cyprus Jitters, US Fed, CNBC, 3/21/13.)

Analyst Commentary:

The Chief Executive for the second largest gold mining firm, Chuck Jeannes, believes gold prices will reach record prices in the coming years due to inflation and safe haven buying. Speaking to the Wall Street Journal, Mr. Jeannes said, “[Analysts] think everything is perfect and the U.S. economy is going to ignore $16 trillion of debt and Europe is fine and China has had a soft landing. If you do believe that, what will be the ultimate result of a strong economy in combination with very loose monetary policy around the world? It will be an inflationary environment….By the end of this year we will be higher than the start of the year, and we will hit $2,000 gold in the next two to three years.”

Forbes contributor Charles Biderman explained why investors should acquire gold: “[I]n a world where the major economies are debasing their currencies to pay bills and with no hope for real growth anytime soon, gold is the best play for the longer term.” (“Buy Gold And Float Shrink,” Forbes, 3/19/13.)

Kira McCaffrey Brecht, the managing editor for Trader Planet offered a powerful commentary on why to own physical gold: “Gold is a multi-faceted hedge. It's a hedge against inflation. It's a hedge against devalued fiat currencies. It's a hedge when central banks around the world continue policies of massive monetary accommodation and quantitative easing. It's a hedge against slower economic growth. It's a hedge against declining paper assets. It's a hedge against global uncertainty and political and military stress. It's a safe-haven.” (“Gold Is A Hedge Against Many Things,” Kitco, 3/22/13.) 

 

Goldline provides a wrap-up of the week's precious metals news along with important commentary on the American Advisor Week in Review audio program. Click here to listen.

 

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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