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Cyprus Fallout and Analyst Quotes

Release Date: 
Friday, March 29, 2013

Gold and Silver Prices:

The New York Spot Market was closed on Good Friday resulting in a shortened trading week. Gold and silver prices closed lower on Thursday, largely due to technical selling. Gold ended the week at $1597.50, down $12.70. Silver closed at $28.46, down $0.40 for the week.

Gold Rises More than 1% in March:

As The Indian Express reports, gold saw a 1.3% gain for the month. “Gold is on track for a 1.3% rise in March — its first monthly rise in six — as worries flared up about the stability of the euro zone, stoked by the crisis in Cyprus and a political deadlock in Italy after inconclusive elections in February…The precious metal also got support from comments of US Federal Reserve officials, reiterating that the central bank would do best to keep buying assets at its current $85-billion-a-month pace until the jobs market is on firmer ground. This means liquidity would remain adequate in the system, likely keeping price pressure within the economy alive and auguring well for gold, which is considered a hedge against inflation. (“Gold price set to regain sheen as euro zone crisis stays strong,” The Indian Express, 3/29/13.)

The Cyprus Banking Crisis and Its Fallout:

After the Cyprus Parliament and its citizens roundly rejected the plan to tax bank accounts, Cyprus and the euro zone agreed to “good bank/bad bank” plan which allows Cyprus to raise billions of euros on the backs of bondholders and uninsured depositors. Under the plan, Cyprus will wind down the Popular Bank of Cyprus and move insured deposits below 100,000 euros ($130,000) to the Bank of Cyprus along with the viable assets. The European Central Bank will provide a bailout of 9 billion euro ($11.7 billion) to the Bank of Cyprus. 

For those depositors holding more 100,000 euros, the uninsured deposits will be frozen and applied towards the bailout. In all, depositors holding more than 100,000 euros are expected to forfeit 4.2 billion euros ($5.5 billion), representing an average loss of 30% to 40%. In addition, senior bondholders will be wiped out. (“Cyprus Bailout: Everything You Need To Know Before The Opening Bell,” Forbes, 3/25/13.)

A survey of economists shows that Cyprus is unlikely to the last euro zone country seeking a bailout. Further, seventy-five percent of the polled economists believe these countries will be required to help pay for their bailout. "The Cyprus deal has brought the European banking crisis to a new level," the director of G+ Economics told Reuters. “This represents a uniquely bad deal for the euro's future." (Cyprus bailout not expected to be euro zone's last -Reuters poll,” Reuters, 3/27/13.)

The International Business Editor of The Daily Telegraph warns the Cyprus bailout may spell the end of the EU’s Economic and Monetary Union (the “EMU”): “The Cyprus debacle has taught us yet again that EMU has gone off the rails, is a danger to stability, and should be dismantled before it destroys Europe’s post-War order. Whether it marks a watershed moment in the crisis is another matter. Italy, Spain, France and Portugal have their own crises, moving to their own rhythm. The denouement will arrive when the democracies of southern Europe conclude that recovery is a false promise and that the only way to end mass unemployment is to break free of EMU’s contractionary regime.” (“Cyprus has finally killed myth that EMU is benign,” The Telegraph, 3/27/13.)

The fear that other euro zone countries may attempt to right their fiscal ship on the backs of bank depositors may support gold. “An increase in safe haven demand, particularly in periphery European nations such Spain and Italy will likely support gold. Citizens in these countries are alarmed by how depositors in Cyprus were treated and the more aware and prudent ones are taking the requisite action in order to protect their families and businesses from the growing possibility of capital controls.” (“Italians Value Gold Reserves - EU Deposits To Flow To Gold,” IBT, 3/26/13.)

Analyst Commentary:

A majority of analysts polled by Kitco see higher prices fueled by safe haven buying: “Several participants cited the continued economic mess in the eurozone as supportive for gold prices and for gold’s safe-haven properties.” (“Gold Survey: Majority Of Survey Participants See Higher Gold Prices Next Week,” Kitco, 3/28/13.)

Hedge funds are reportedly bullish on commodities such as gold, according to data from the Commodities Future Trading Commission. “Gold prices have risen 1.8 percent in March, heading for the first monthly gain since September. The metal is still down 4.1 percent this year as the U.S. unemployment rate fell and assets in exchange-traded products backed by gold dropped 6.7 percent. Investors increased their bullish bets by 63 percent to 70,193 contracts, the biggest expansion since September 2008.” (“Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities,” Bloomberg, 3/25/13.)

Two recent forecasts see silver potentially rising to $200 in the next decade, driven by investor and industrial demand. “Silver could climb up to $200 an ounce in the next decade, predicted a Western Australian miner. The prediction, made at last week's Mines and Money conference in Hong Kong, would mean a sixfold price increase for the precious metal…. Eric Sprott (CEO of Sprott Asset Management) predicts silver price to rise to $200oz…” (Silver could hit $200 an ounce by 2023,” 3/27/13.)

Mark O'Byrne, director of research at  GoldCore Ltd., told Bloomberg TV that gold prices may reach an all-time record high of $2,400 per ounce. “The death or demise of the gold bull market is greatly exaggerated…Gold’s value is its proven safe haven diversification throughout history… Gold’s nominal high in January 1980 was $850 per ounce; in inflation adjusted terms that’s $2,400 per ounce… we believe it is most likely would surpass this level… I think it will mostly likely happen within the next 12-18 months although there are absolutely no guarantees.” (“Gold Prices May Reach Record High in 12-18 Months,” Bloomberg.com, 3/28/13.)

Metals Analyst, Kira McCaffrey Brecht explained the need for diversifying into assets such as physical gold increases with the growing worldwide fiscal crises. “The case for physical ownership is heightened when investors look at the situations unfolding in countries around the world. Cyprus is not the only pointed example right now… Restrictions on what one can do with their bank deposits, restrictions on currency exchange and the risk of devaluation are being seen right now in Cyprus and Argentina. Fiat currencies are vulnerable and it only clarifies the focus on diversification into physical gold and the benefits that can offer individuals.” (“Capital Controls, Devaluations and the Case for Owning Gold.” Kitco, 3/28/13.)

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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