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Demand for Gold/Silver Up; More Bank Seizures Coming?

Lessons to be learned from European bank debacle

The gold and silver futures markets largely shrugged off events in Cyprus, with spot prices falling slightly last week. It was a different story in the physical markets, with nervous investors contributing to brisk demand for bullion at Money Metals Exchange and other dealers.

Lessons from the European Debacle

It will be some time before investors can fully evaluate the effect that seizures of Cypriot bank deposits will have in other markets around the world. Nevertheless, there are some lessons to be garnered right now:

  • The banks aren't fixed. EU officials made repeated assurances to their citizens that the problems in the financial system are contained and recovery is just around the corner. They crowed proudly about taking bold action to avert crisis. Such posturing by central bankers seems awfully familiar.

    In reality, bankers everywhere are up to their necks in bad loans and other worthless investments, and the only question is who will take the hit on those lousy bets. If the banks are allowed to fail, its creditors (depositors) could be wiped out. If bureaucrats confiscate deposits directly, then savers are sure to take a big hit. If central banks print the money needed to bail out the banks, all holders of the currency stand to get decimated via inflation.

  • Depositors will not realize there is a problem until it is too late. If you are an official planning to confiscate deposits, the element of surprise is paramount. Bank customers should expect zero advance warning. They will discover the problem when the doors to their local branch are locked and ATM cards no longer function.

    Anyone with 100% of their assets tied up in the financial system should diversify immediately. Anyone with any uninsured bank balances should put funds elsewhere. And anyone counting on access to bullion stored in a bank safe-deposit box should consider taking personal possession of some or all of their holding.

  • There is no assurance that bank closures and deposit confiscation won't happen here. The Federal Reserve will most likely bail-out U.S. banks in the event of another financial crisis. Acting as a lender of last resort to the private consortium of major banks that own it, is after all one of the Fed's primary functions and that is the role it played during the 2008 meltdown. But, surprisingly, EU officials didn't choose the print button and opted instead for outright seizure.

Europe remains in the spotlight. It will be quiet week in terms of scheduled reports:

  • Tuesday, April 2nd – Factory Orders. Manufacturing data has weakened of late.
  • Friday, April 5th – Employment Report. The most recent jobs reports have beat consensus, with the headline unemployment number falling to 7.7% in March. As Money Metals often points out, much of the "improvement" in the unemployment rate can be attributed to the long-term unemployed simply falling off the rolls and no longer being counted. The rate of employment – in other words, the percentage of the populace that actually has jobs – is a far better measure of economic health. This rate remains at generationally low levels.

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