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March 25, 2013

Release Date: 
Monday, March 25, 2013

Gold prices fell on the New York Spot Market during morning trading after Cyprus reached agreement with the EU and IMF for a bailout of the island’s collapsing bank system. Despite the drop, gold remained above $1600 per ounce. Silver was modestly higher. You can see the most current spot prices here

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.)

Analysts warn that the losses to depositors and bondholders may have long ranging implications for the euro zone. Charles Goodhart, emeritus professor at the London School of Economics, told Bloomberg, “They will swear black and blue that Cyprus is a unique case but so was Greece… You can talk about the inviolability of insured deposits but the problem now is would anyone believe you.”

“The true test may only come if the rot spreads from Nicosia and starts to infect larger economies,” said a senior economist at ING Group in Brussels. “Germany won the bet as Cyprus eventually bended,” echoed a former European Commission economist. “However, this strategy is not risk-free and will hardly work with bigger countries with a broader economic business model than Cyprus.” (Saving Cyprus Means Nobody Safe as Europe Breaks More Taboos Bloomberg, 3/25/13.)

Commenting on investor reaction to the Cyprus deal, the President of Lido Isle Advisors said gold had “a whipsaw morning with a big selloff on initial Cyprus deal optimism,” gains some ground “as the market may assume that the only thing that can save the euro is simply more liquidity, which could be bullish for gold….” (“Gold down, but ends above $1,600 after Cyprus deal,” MarketWatch, 3/25/13.)

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.)

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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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