Money Is No Longer Safe In Banks After Cyprus Theft

“There are bank runs here in Europe again, Eric. Today is a national holiday in Cyprus, so the banks are closed. But people are lining up at ATMs to get their money out before the ATMs run dry. And there is talk that a bank holiday will be declared, possibly keeping them closed for days.

Depositors in Cyprus are going to lose some of their money as part of a proposed EU bailout of that country announced over the weekend, which like a a number of other countries, along with its banks, are insolvent and teetering on the edge of bankruptcy….

“To help fund this bailout the government is taking 9.9% of all deposits over €100,000 and 6.7% under that amount, even though these small deposits are supposed to be insured, which is a key point. Bank insurance means nothing these days when bureaucrats and politicians are looking for wealth to grab.

It is indeed mind-blowing, particularly when considering that the banking system in Cyprus is not that big. The total amount taken from depositors is only €5.8 billion. Given what the ECB and other central banks are printing these days, €5.8 billion is small change.

What is particularly troublesome is that senior bond holders are again being given a free pass. It is proposed that they will be paid in full, which has to be really angering to small savers.

I don’t know what the eurocrats and the IMF were thinking. Most likely they were not thinking, nor considering the unintended consequences of their decision. But as you and I have have been discussing for some time, Eric, money in a bank is not safe. The lessons now being learned in Cyprus proves the point.

Here is how my colleague describes this wake-up call to bank depositors.

1) It places depositors below bondholders, riding roughshod over property rights. It is a clear example of the state placing itself above the interests of its citizens, and will be noted by depositors in all troubled jurisdictions.

2) The politicians are now dithering on the announced terms, which will most probably extend the crisis and destroy confidence.

3) The longer Cyprus’s banks are closed, the more the crisis is likely to intensify.

4) The package assumes continuing Russian support for Cyprus. As this mess develops the Russians are increasingly likely to walk away.

5) Contagion into the Greek banks appears certain, with possible threats to Russian and middle-European banking systems.

6) Depositors all around the eurozone are likely to seek alternatives to bank deposits. These alternatives are likely to be cash withdrawals, capital flight into Swiss and other banks, and into physical gold.

I share these views as well as his conclusion that the hope the Cyprus crisis will be contained looks misplaced.

To me this proposed bailout is outright theft, and theft cannot be justified, but the central planners are trying to do that anyway. They are claiming that much of the money on deposit in Cyprus belongs to Russian oligarchs and Russian mafia. So the message from the EU and IMF oligarchs to the Russian oligarchs is clear: It may be your money, but it is deposited in banks under our control, so we can grab it if we want. The rule of law and the respect for private property continues to be eroded.

As expected, there already has been some back-pedaling by the central planners. They seem to be regretting their decision, but the damage has already been done. This weekend’s announcement is an eye-opener for anyone who has not been paying attention to what is happening around the world as this ongoing financial crisis leapfrogs from one country to the next.

There is one other important point to make here, Eric: The mainstream media is mislabeling Cyprus as a euro crisis. It is not. It is a banking crisis that counterintuitively may cause the euro to strengthen. That outcome will depend largely on how the ECB reacts to this latest crisis, but if it refrains from printing because of pressure from bailout-weary northern Europe, the euro could pop. After all, the Federal Reserve – the king of money printers – expanded its balance sheet by $56 billion last week.

Give this backdrop, it is not surprising that the gold and silver picture is becoming increasingly bullish. First, it has been 4 weeks since the low as made. Second, and more importantly, the trading range in which the metals have been stuck is narrowing. While the shorts and central planners have been steadfast with their selling and intervention to keep gold under $1600, and silver under $29, the physical buyers under the market have become more aggressive. So we are getting ever closer to the breakout above resistance. The shorts and central planners cannot hold the line much longer.

We’ve seen this scenario unfold many times over the past twelve years, and the outcome is always the same. The physical buyers always win. While the shorts and central planners can throw a lot of paper at the market – and they do – in a battle like this, they eventually have to come up with the goods. In other words, they have to keep delivering physical metal into the market in order to keep their credibility. Any hint of a default or force majeure would knock the props out from under the paper traders and clearly signal an end to their price suppression scheme.

Ultimately it comes down to value, which is why the longs have always won these battles over the past twelve years. They know that gold is good value. Though gold’s price may seem high, it is still undervalued because the dollar is being continually debased. The other advantage to owning physical gold and silver is particularly important in view of the Cyprus events. There is no counterpart risk. You have money safe and secure outside of the banking system.

But physical buyers also know something else, Eric, which is even more important, they know that they are winning the war. To prove it, all they need to do is look back at the rate of appreciation in gold and silver the last 12 years. Gold is up 16% per annum on average against the dollar and double-digits against all the major currencies, while silver has done even better than that, rising on average 20% per annum on average for 12 years. What’s more, given that central banks are continuing the same destructive policies, there is even reason to suspect that the precious metals will have similar rates of appreciation this year.

The events in Cyprus are obviously a scary message that the Greeks, Spaniards, Italians and others are taking seriously because they see that their money in the bank is at risk too. But the less obvious message is that all money in banks is at risk. Not only are bank assets impaired, but all the banks are interlinked because they lend to one another and own a lot of debt of insolvent countries.

The money taken from Cypriot depositors is being called a ‘tax.’ The central planners are doing this to hide this theft behind the facade of legality. In reality it is nothing less than outright confiscation.”

Turk also added: “The risk here does not come from owning metals. Instead, the real risk is clearly in not owning any physical gold and silver.”