The always entertaining Eurosceptic politician Nigel Farage summed up how Europeans should interpret the Cyprus deposit theft : 'Get your money out while you can!'
Even your editor's German grandmother is panicking now that deposits aren't safe in Europe. 'Happy Birthday Nick,' she wrote in an email. 'Send me your account details so I can send you some money as a gift.' Nothing wrong with that. Except that the birthday wishes are a month early.
Clearly a deposit flight is taking place in central Europe. Our grandmother wouldn't get our birthday wrong. No, people are trying to get their money out any way they can. Better let our aunts and uncles know...
The Cyprus story is probably just another sideshow in the end. It's the fifth country (out of 17) requiring a bailout. And it's the smallest so far.
It's quite simple really. Imagine you were broke and had a bunch of bullies known as the Australian Tax Office and the police force to do your bidding. What kind of politician would you be to resist raiding deposits?
Of course, you'd have to organise an indefinite bank holiday while you get away with the loot. The bank holiday in Cyprus has been extended to more than a week because politicians are unable to decide how much to take.
Dr Alex Cowie is flying the Diggers and Drillers flag in Hong Kong at the Mines and Money conference. Yesterday we took a look at his speech. This morning, Alex sent through an update of what his fellow speakers were saying. And, as you can imagine, Cyprus was on everyone's lips, even though it's a mining conference.
Here's how Alex summed things up:
'[Resource guru] Eric Sprott drew a decent crowd for his talk, which focused on precious metals of course. He covered a ton of stuff, starting with a look at debt at the sovereign level, and kicked off with a quote from Mark Carney, the Bank of Canada chief:
'The Global Minsky moment has arrived. Debt tolerance has decisively turned. The initially well-founded optimism that launched the decades-long credit boom has given way to a belated pessimism that seeks to reverse it.'
'The shenanigans in the Cypriot banking system are the perfect backdrop to all this. With bank runs in Europe possible, he emphasised, 'having money in the banks - a highly leveraged counter-party - is a risk'. The troika (EU, IMF, and ECB) would do all they could as, 'No one wants the first domino to fall,' - but options are running out.
'By the way, the ECB has pumped $1.2 trillion into the European financial system in the last few weeks via bank swaps apparently. I must have missed the memo on that one. Clearly there is some trouble brewing.'
'... the CEO of Newcrest, Greg Robinson, pulled out a few other cool facts. For instance, I didn't know that half of the money spent in exploration globally last year was spent looking for gold. And with very little result. No one is finding big deposits any more, no matter what they spend. So future supply will be hamstrung. Much higher prices will be needed to stimulate future supply.'
If you restrict supply, that means higher prices. The problem is, gold investors are up against the political world. Gold is a barometer of government and central bank irresponsibility. When deficits are out of control and money is being printed, gold goes up in price. So you can imagine why politicians and central bankers don't like to see gold doing well. Alex explains just how powerful this sentiment really is:
'In the 1980's, Volker admitted that in reference to the gold run of the 70's 'the biggest mistake we made was not controlling the gold price'. Sprott expects that the gold price is being similarly managed today to create the illusion of recovery, when nothing could be further from the truth. During Barack Obama's presidency, the number of food stamp users has jumped form 20 million to 47 million, or 15% of the US population.'
But while the recovery remains an illusion, the deficits will continue and the money will be printed. Eventually, the gold price will surge. If you want to be prepared, check out Alex's video on how.
Alex also listened in on a debate between Chinese bankers on the prospects for China's economy. Keeping in mind Australia's ties to the Chinese construction boom, this is something all Australian investors need to keep an eye on.
Until now, Chinese savers have been buying houses regardless of their ability to rent them out. Hence the empty ghost cities. The reason, according to a Chinese friend (whose parents have done this) is inflation. But recently, the Chinese government has made moves to open up gold ownership to its citizens. It removed a 17% tax on Chinese gold panda coins, for example.
If Chinese savers diversify big time into gold, that could leave China's construction boom without buyers just when it was looking shaky already. Demand for Australian resources could tumble at the same time there is a boom in demand for physical gold. So would you rather be left owning Rio or Newcrest?
By the way, apparently the Reserve Bank of New Zealand has an existing power to 'shave' off deposits in a banking crisis without notifying depositors. It's called the 'Open Bank Resolution Policy'. If anyone in New Zealand wants to send us money for our birthday too, send us an email at firstname.lastname@example.org. Or just buy gold.
The Daily Reckoning Weekend Edition
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14-03-13 - Greg Canavan
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Nick Hubble is a feature Editor of The Daily Reckoning Australia. (You can subscribe to the Daily Reckoning for free here.) Nick has spent the last three years discovering lots of new, exciting and surprisingly simple ways to generate money for retirement. He’s put all these ideas into his investment publication The Money for Life Letter. If you're already a subscriber to these publications, or want to follow Nick's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.