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Julian  D. W. Phillips

Julian D. W. Phillips

Global Watch: The Gold Forecaster covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a…

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Has the Gold Price Turned the Corner?

Special Report

Technical Picture

Gold bounced off $1,560 a target that it had held for the last year and more. It consolidated at $1,580 and has now tackled $1,600.The bounce was off the long-term trend line. While resistance in the higher $1,600 area could be formidable a look at the reasons why it fell through support at $1,650 is worthwhile.

Recent Fundamentals

The prime cause of the gold price falling so much in the last few months, has been the over 100 tonnes of sales from the SPDR gold Exchange Traded Fund, an amount that triggered a considerable amount of stop loss selling.

While central banks have been buying, their way of buying is to target available volumes of gold sitting in the market. Dealers with gold contact central banks and make an offer, which is accepted. Central banks don't chase prices and find their stock as prices fall. This takes gold off the market leaving smaller amounts for buyers once the gold price turns up.

A negative fundamental that has surprised many is the fall off in Indian demand as the government there raised duties on gold and have required "know your client" documentation on large retail purchases of gold. With their hatred of exposing their finances to government scrutiny, these measures have and are slowing Indian demand. But India is no stranger to buying gold when their government doesn't want them to. So they will be back, even if we won't be able to accurately quantify their buying in the future.

Until recently the absence of Indian demand allowed short-term traders and speculators, alongside the sellers from the SPDR gold Exchange Traded Fund to dominate the gold price.

But after the end of the Chinese Lunar New Year, we saw a steady rise in Chinese demand that has grown, while sales from the SPDR gold ETF have waned and have now turned to buying gold again.

If the gold price continues to rise, even gently, it will squeeze short-term operators and push them to go long. But the stock they sold off just isn't there anymore. That's why this last week we have seen New York then Asia taking the gold price higher.

The changes from a selling market to a halt in sales have allowed demand from China to take gold higher.

Then Cyprus

A concept that was regarded as an unrepeatable piece of history happened this weekend. The word 'confiscation' came to life as depositors in Cyprus had money taken from their bank accounts as their banks were closed at the weekend. But history tells us that this is always the way that government works when it acts in its own interests, ahead of those of its citizens.

It has sparked fears that if the Cypriot Parliament accepts these terms or any confiscation whatsoever, it sets a precedent that may well apply in the future to other situations in financially distressed nations. Now that the Cypriot government has rejected these terms and once the E.C.B. funding is cut off, we expect the resurrection of its old currency and Capital Controls to be imposed. Confiscation of private citizen's money in all forms is now a future probability against which wise investors should protect themselves.

Justice has gone, as depositors have done nothing wrong, but are paying the price for banker's errors. The Cypriot Bankers did nothing wrong except trust the government bonds of their mother country Greece. This is a classic ripple effect.

Cyprus has until Monday to agree the terms, which the E.U. has refused to budge on, after which the European Central Bank Funding will be cut off. It appears that the International Monetary Fund, during the negotiations, had even gone so far as to suggest a 40% cut on certain deposits or to freeze deposits for up to five to 10 years.

Few people in the world believed that the monetary authorities had the power to impact depositors this way. Confiscation of deposits has set a precedent that will be the death knell for an E.U. Common Deposit Guarantee scheme. It intended that depositors would be the first to be repaid in insolvency. This so-called tax on depositors under €100,000 calls into question everything the EU has been trying to do to protect ordinary depositors and taxpayers from bank failures for the past five years.

It will also change the reaction of depositors in nations where doubts rise over the soundness of banks. "Runs" on bank will now happen immediately the specter of crisis appears. Creditors and depositors will be reviewing their lending on a broad front to protect against such eventualities in the future.

Cyprus had been reasonably stable before the financial collapse, but was rocked by the Greek bond restructuring as Banks in Cyprus had invested in Greek government bonds. But what dealt a fatal blow to Cyprus was the impediment to borrowing because of a credit downgrade to BB+, which made the Cypriot bonds unacceptable as collateral to the ECB, and certainly not viable on the public markets.

Monetary System Damage

Of far greater consequence is the blow to confidence in the entire monetary system. If it can be done in Europe in extreme times, it can be done anywhere. Prudent investors will be reviewing how to protect their assets on a broad front, not just in gold and silver.

But gold and silver's attraction has been enhanced as the blow to the reliability of governments, banks and savings is heavy. Trust has been damaged. The safety of deposits in banks is now called into question. Deposits under €100,000 were thought to have been insured and inviolate but the proposals from the E.U. and the I.M.F. mortally damaged the integrity of the E.U.'s monetary system.

In reality the U.S. controls the I.M.F. The fact that it could have acted so aggressively has marred their name too. It tells us that such actions can occur anywhere in the world under similar conditions.

Fall in Confidence, Trust & Integrity

A fall-off in confidence in the monetary system is one of the reasons that Asian nations have stopped increasing their dollar holdings and emerging nations across a broad spectrum have been buying gold and will continue to do so long-term.

Why should these moves have caused so much damage? Because currencies hold value as long as its users believe it holds that value. The moment you hurt that value in individual holder's hands, you damage that value and the credibility of that type of money. The draconian actions of the E.U. and I.M.F. question that value and the very value of savings in banks. The principle that you can keep your savings provided your government doesn't need them is now established in investor's minds.

This has a direct but invisible impact on the value of gold and silver. The precious metals can be held beyond the reach of government (in India there is around 20,000 tonnes of gold hidden away in private hands and out of sight of their government) should be part of an investors criteria.

In the developed world, very few individuals hold gold in the way the Indian investor does. There he still trusts his government and his bank to be loyal, faithful guardians of all his assets. The concept of holding assets outside the reach of government, legally, has not gained traction yet. But the actions of the E.U. and the I.M.F. have damaged that trust, making the investor think of ways to guard against such confiscation.

Gold Price Turning the Corner

Short-term the gold price is not moving on the Cyprus story. It is moving, quite simply, on the cessation of sales of gold from the SPDR gold Exchange Traded Fund and because Chinese demand is of sufficient quantity to move the price up. Gold is once again being bought by this fund and speculators are being forced to turn their short positions into long ones.

So how should we treat the Cyprus debacle in terms of precious metal prices? It has caused a structural change in investors' views on savings and on the control they have on their money. As part of effective saving of wealth, investors have to try to find ways of removing the potential threat to their wealth from monetary authorities.

To ignore that threat would be to become a lemming, following the herd ahead, no matter the final fall that will certainly come. It makes gold more attractive and silver too. It moves precious metals from a temporary investment to a core investment. But holding precious metals out of the reach of government and the penalties that could attend holding them will become the preferred way forward. After all what's the point of investments at all, if governments can simply walk in and take a chunk out of them, particularly when you made a wise investment but your bank didn't?

So long-term, the Cyprus debacle has lowered confidence in the monetary system and raised it in precious metals, which will eventually have a significantly positive impact on gold and silver prices.


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