EU Agreed Banking Union Yesterday - Global Bail-Ins Cometh ...

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Friday’s AM fix was USD 1,338.50, EUR 970.21 and GBP 810.57 per ounce.

Thurday’s AM fix was USD 1,327.00, EUR 962.64 and GBP 802.78 per ounce.     


Yesterday, gold climbed $15.27 to $1342.27 at about 7AM EST before it fell back off in New York, but it still ended with a gain of 0.44%. Silver rose to as high as $20.579 at one point, but it then fell back off and ended unchanged on the day.

Euro gold rose to about €966, platinum gained $2.30 to $1432.00, and copper climbed slightly to about $2.95. Palladium prices, meanwhile, closed at a level not seen in more than 2 years with the rally linked to worries about risks to Russian supplies of the metal.

Palladium surged 3.1% to the highest since 2011 on concern supply from Russia may be restricted.

Gold finished higher on Friday, partially recovering from a four-session losing streak on the back of a weaker U.S. dollar, but the metal’s prices still suffered from their worst weekly loss since November - down over 3.5%.



Gold in U.S. Dollars, 5 Days - (Bloomberg)

Gold had become overbought after its surge to 6 month highs and was due profit taking and a correction. A perception of an abatement of tensions between Russia and the West has contributed to the pullback this week. Momentum could lead to further falls next week but we expect weakness will be short lived.

 

Gold’s Technicals
There is a risk that gold could fall below immediate support at $1,320/oz and the next levels of support are at $1,300, $1,240 and then back where we started the year at $1,200. A 50% retracement would not be unusual after the speed of recent gains and that would take us to the psychological level of $1,300/oz again.  

Gold in U.S. Dollars, 1 Year - (Bloomberg)

A political solution needs to be found as governments continue to opt for economic sanctions of various degrees, it could degenerate into a full blown trade and economic war. Were this to occur the benefits of free trade and globalization that we have seen in recent history would be at risk - creating real challenges for the global economy.

The premiums that risk assets such as stock markets command could quickly be lost as market participants reevaluate asset allocations in the light of the more risky economic and geopolitical situation.



Gold in U.S. Dollars, 43 Years - (Bloomberg)

Hopefully, calm and wise counsel will prevail and a diplomatic political solution will be found. However, in the meantime, gold continues to be an important asset to own in order to hedge these and other geopolitical and economic risks.

 

Yellen At Fed - Print Baby Print
It was very welcome to see a woman taking over the helm of the Federal Reserve. However, we cannot allow our goodwill in this regard to cloud judgement and impact our analysis of her and the Fed’s performance and policies.

Yellen gave mixed messages, both on the economy and on monetary policy, but market participants have chosen to focus on some of the more hawkish comments that she made. She acknowledged that the Fed may have been too optimistic about the economic outlook recently. Yet, she and the Fed largely stuck to their projections for how growth and inflation will unfold in the coming years.

 

It is important to remember that the Fed did not predict or foresee at all the sub prime crisis, the housing bubble, Bear Stearns, Lehman, the global financial crisis and subsequent recession.

The dollar is set to be structurally weak in the coming years given the still significant imbalances in the U.S. economy and still very poor fiscal state of the economy. No amount of jaw boning or Fed tinkering with interest rates will change that.

While interest rates may rise from nearly 0%, they are set to remain low for the foreseeable future. At least until the bond markets decide to enforce fiscal discipline on the U.S. Then interest rates will likely rise substantially leading to a severe U.S. recession.


US Govt 10 Year Yield, 1971 to March 2014 - (Bloomberg)

On a long term basis, it is likely that the dollar will remain weak and gold's bull market will continue until the end of the interest rate tightening cycle which will likely be between 2020 and 2025.

This was seen in the 1970s when interest rates surged higher that decade from a low in March 1971, to a high in September 1981. The U.S. 10 Year went from 5.38% to 15.84% during that period and gold rose from near $35/oz to over $850/oz in January 1980 (see charts).

 

Thus, contrary to the popular perception, rising interest rates are not bearish for gold. High interest rates and real positive interest rates in a sound economy are very bearish for gold prices and will burst the coming gold bubble. However, that is a long way off - likely between 2018 and 2025 and likely when gold prices are well above their inflation adjusted high (CPI) of $2,500/oz. Indeed, longer term prices over $4,000/oz or $5,000/oz are quite feasible.


EU Agrees Banking Union - Bail-Ins Cometh ...
 

In the early hours of yesterday morning European Union politicians struck a deal on legislation to create a single agency to handle failing banks and bail-ins in the Eurozone after another all night negotiating marathon ahead of a summit of EU leaders starting in Brussels today.

German Finance Minister Wolfgang Schaeuble was drawn into the talks around 0530 GMT as the negotiations dragged on into the night. The politicians emerged around 0715 GMT with the deal, which now will need formal approval by the European Parliament and by national governments.


Negotiators persuaded nations that had been opposed to the proposed Single Resolution Mechanism and the legislation for bail-ins to agree.


Insolvent banks will be treated equally regardless of the country they are based in. Failed banks creditors, both bond holders and depositors, will be subject to bail-ins in the same way in all countries.

“It’s a very good agreement,” European Central Bank President Mario Draghi said before the meeting of EU leaders in the Belgian capital. The banking union was shaped in part by Draghi and he hailed the compromise plan as “great progress for a better banking union. Two pillars are now in place.”


Plans for a single banking union were put together two years ago due to fears for the euro and the EU’s 6,000 banks. Countries wanted to break the link between sovereigns and insolvent banks to ensure taxpayers were not forced to bail out insolvent banks and to prevent contagion and a systemic crisis.

It had already been agreed that shareholders and importantly now depositors will be bailed in before the single resolution fund can be tapped. About 100 banks plus transnationals and those already bailed out will come under the direct supervision of the ECB from January.


While most of the coverage is on the European Union member states and the European Parliament agreeing the final details of a single resolution mechanism (SRM) to wind up failing banks, there is little coverage of the developing bail-in regimes and the heightened risk that depositors in the Eurozone now face.  


Banks in the Eurozone remain extremely vulnerable. Our research on
bail-ins and the developing bail-in regimes clearly shows how banks remain very vulnerable and it is now the case that in the event of bank failure, your deposits could be confiscated as happened in Cyprus.

It is important to realise that not just the EU but also the UK, the U.S., Canada, Australia, New Zealand and most G20 nations all have plans for bail-ins in the event that banks and other large financial institutions get into difficulty.

The coming bail-ins will pose real challenges and risks to investors and of course depositors – both household and corporate. Return of capital, rather than return on capital will assume greater importance.

Evaluating counterparty risk and only using the safest banks, investment providers and financial institutions will become essential in order to protect and grow wealth.

It is important that one owns physical coins and bars, legally in your name, outside the banking system. Paper or electronic forms of gold investment should be avoided as they along with cash deposits could be subject to bail-ins.

Educate yourself about this emerging threat to your livelihood by reading:
Bail-In Guide: Protecting your Savings In The Coming Bail-In Era (10 pages)

Bail-In Research: From Bail-Outs to Bail-Ins: Risks and Ramifications (50 pages)