Cyprus Bailout Roils Markets and Encourages Silver Safe Haven Demand – Federal Reserve Meeting Offers More of the Same – North Korean Threatens to Use Nukes On US Bases in Japan – European Purchasing Managers Index Drops to Recession Levels Again.
Silver closed at nearly even for the week in what proved to be another volatile and rollicking time period filled with eventful fundamental news for the markets.
The white metal opened at $28.77 per ounce, and despite some wide swings up and down closed at $28.74 in spot markets on Friday, March 22nd. Precious metals again found themselves in vogue as safe haven assets, yet were still restrained by headwinds to the industrial use side of their nature.
Silver held steady as a ship through the storm by the end of the week in response to the unfolding saga of Cyprus, a Federal Reserve two day meeting, new North Korean threats to deploy nuclear missiles against the United States’ interests, and fresh data from Europe showing the EU economic zone again sliding towards recessionary territory.
Cyprus Bailout Roils Markets and Encourages Silver Safe Haven Demand
Undoubtedly the biggest story of the week when you turned on the financial news channels centered on a relatively small Mediterranean island nation Cyprus. For decades, this haven of prosperity nicknamed the sunny isle for its over 300 days a year of sunshine per year grew and prospered in what was called the modern economic miracle of the Republic of Cyprus. Unknown to most people, the real engine of their growth and success lay in their enormous offshore banking industry.
In less than a week, the merely troubled banking industry in a country whose GDP is less than that of Wichita, Kansas grew to be the proverbial 800 pound gorilla in the world’s living room. How could this happen? Russian money had been invested in Cypriot banks as a convenient place to hide and launder it, and the Russians lived in Cypriot towns in such numbers that there are high streets filled with Russian luxury goods stores that sell everything from exotic Russian foods to fur hats and coats. The banking industry grew to be 8 times the entire annual economic output of Cyprus as a result.
It sounds good so far, especially if you are among the 1 million inhabitants of Cyprus. The problem came as the three largest banks in Cyprus were encouraged to invest their own money, and that of their depositors, in Greek Sovereign Debt bonds a few years ago when the ECB encouraged European banks to help out their troubled Greek neighbor.
If you know the story of what happened to Greek bondholders who were all made to take “haircuts” on the value of these bonds, then you can guess the rest of the sordid tale. Cypriot banks lost their shirts, and those of their deposit holders along the way. By last Monday, all of the banks in Cyprus had been closed down to prevent wholesale capital flight and full scale runs on the banks.
Despite these efforts, a slow motion run on Cypriot banks occurred through ATM machine withdrawals. The so called gang of three, the “Troika” of the European Union, The European Central Bank, and the International Monetary Fund, bore much of the blame as they not given Cyprus a concrete answer on their request for a bailout.
Now they offered harsh terms that caused the Cypriot parliament and governing party to wring its hands in anguish. All of this was highly supportive of precious metals markets as investors feared that the contagion in Cypriot streets and ATM lines would spread to troubled bailout and near bailout status nations including Ireland, Portugal, Spain, and Italy.
The situation is finally being brought to a climactic conclusion which looks like the Russian depositors and investors will bear the lion’s share of the losses. Meanwhile, Cyprus’ banking industry lies in smoldering ruins.
Needless to say, if you were nostalgic for the EU sovereign debt crisis, it is back once again. The wild uncertainty in the Eurozone all this past week, and maybe for the immediate future, is tragic for the people of Cyprus but good for silver prices.
Federal Reserve Meeting Offers More of the Same
In other news this week, the Fed’s two day FOMC conference may have been overshadowed by the news out of Cyprus and Brussels, the EU’s headquarters, but it happened all the same. The meeting kept the status quo in place for money printing to infinity to continue until further notice.
Ben Bernanke and company will not be raising the interest rates until at least 2015 as they had said previously (though no one who does the math on the interest payments on the over $16 trillion in national debt is sure how they will ever be able to raise them!). This fact of life continues to support silver prices and all of the precious metals’ prices.
North Korean Threatens to Use Nukes On US Bases in Japan
Nothing supports the silver and the other safe haven metals so well as a good nuclear threat. North Korea had opened this Pandora’s Box last week when they threatened to destroy Washington D.C. in a reign of atomic fire. This week, they tried to outdo themselves when they claimed that they might launch a nuclear strike against American bases in Japan.
They certainly have the proven nukes to carry out such a threat, and their newest target is much closer to home and hence easier for them to actually hit. This latest geo-political hotspot bears watching as additional tensions that arise between America and South Korea versus North Korea could conceivably cause gold and silver prices to skyrocket.
European Purchasing Managers Index Drops to Recession Levels Again
One thing holding silver back from vaulting over the $30 price bench mark lately has to do with the fact that the so called economic recovery around the world continues to demonstrate that it is unproven and unfounded.
This last week, the EU showed that the worlds’ largest economic block is in fact not really getting better, but quite probably is getting worse. Thursday saw the Markit Data Euro Zone Composite Purchasing Managers’ Index drop to 46.5 for March, down from February’s 47.9.
Any number under the all important 50.0 mark means that there is economic contraction taking place. Friday, EU powerhouse and paymaster Germany’s business confidence showed an unexpected decline from February’s 107.4 to 106.7 in March. The EU stymied in recession is bad news for silver’s industrial applications facet of its split personality (with safe haven buying being the other side).
Take Away on Silver Markets
TDS Securities summed the big story of the week up very well when they indicated that precious metals will become an appealing alternative investment as individuals around the world begin to worry about how safe their deposits are.
With the U.S. in unprecedented debt (the largest debt in the history of the world in outright terms) and printing money at a pace that would make long gone money printing regimes dizzy, and Europe still on the ropes battling its own worst enemy of its past spending and borrowing habits, individuals and investors the world over are taking notice and looking for other places to go park their money.
Silver is one of those favored safe destinations, as it derives its spending power from its rarity, historical precedent, and innate value, and not from any corrupt government’s decree.