With the fate of Cyprus under deliberation this weekend it is becoming apparent that the only debate is over what is the least worst option to take. The important thing for global finance is that the principle that bank deposits are safe within the European Union is about to be violated.
Once this golden rule is broken then the contagion is obvious: where will depositors money be seized next? And is it safe to keep all your money in a bank?
The cautious investor will seek to diversify away from bank deposits. And the one way to keep your money without a third party is to buy gold. Ergo more people decide to buy gold and the price goes up. Will this take weeks or months, that is harder to say.
UK Independent Party leader Nigel Farage today warned UK expats in Spain to withdraw their money from Spanish banks in case they have to copy Cyprus and seize deposits. Spot the next bank run in the making. Buying gold is a logical alternative.
But it is not as though you can turn on a tap to get more gold. There’s a TV program on the Discovery channel at the moment about gold production. You see guys in Alaska with huge amounts of hi-tech equipment happy to scratch out a hundred ounces in a month. You see the world’s deepest mines where a tonne of ore yields an ounce of gold.
Gold is rare stuff and very hard to extract from the earth, that is why it has such value. You also do not have to rely on a bank to look after it for you. This is why Cyprus is so significant.
In Cyprus bank deposits are being treated like loans to the banks, not money put there for safe keeping. It is supposed to be the banks that take risks lending the money out, not the depositors. Everybody who has their money in a bank somewhere in the world should be thinking very carefully about this.
Red letter day
The warning signs are written in big red letters over many banks and nations these days. Just how big are the national debts? How many bad loans does this or that bank hold? Does a country’s housing sector still look overvalued and held up by outsized mortgage finance?
If anything looks fishy along these lines then you are advised to slip your money away before the net closes. There must be thousands of offshore bank depositors today in Cyprus who dearly wish they had done just that a few months ago and perhaps bought a money that no central banker can touch like gold or silver.
This lesson will not be lost on other depositors and whatever happens to Cyprus that could indeed make its banking crisis far more significant for the gold price than even the 2008 crash and its impact on global finance. As usual Mr. Sinclair is several steps ahead of the pack, that is why he became one of the greatest gold traders of all time.