Cyprus – A Frightening Update After An Historic Bank Holiday

The Cypriot banks are opening as we speak. Which changes is the country undergoing since Friday March 15th (the day before the historic bank holiday started)? What are the new constraints for holders of deposit accounts, also known as capital controls. Zerohedge reports on the measures that were taken and communicated last night:

In other words, all said “reopening” will do, is to allow physical branches to be used as glorified ATMs but with a very terrified and confused carbon-based teller on the other side (the same ATMs which a few days ago saw their limit reduced from €300 to €120). All other cash transactions will be strictly curbed, virtually no cash will be allowed to exit the island, and the what’s more the government will ban the termination of the oh so ironically-named time deposits. This means that time deposits will now become “permanent deposits”, even if within the €100,000 insured limit. The good news: credit card treansactions will be permitted when paying for goods and services anywhere on the island. Of course, electronic cash just happens to not be physical cash, which is why the bank is so cavalier with allowing people to access their own money. Well, electronic 1s and 0s-based money.

The situation last night in the Cypriot capital appeared to be somehow dominated by the police. Faisal Islam from Channel 4 News tweeted the following (Source):

tweet_march_28_2013

Meantime, as we speak, the banks did reopen and people are queuing to get their money / savings out of the ailing banks. NY Times writes that the calm of the previous hours has given away to tensions. The Guardian has an almost real-time reporting with lots of pictures and tweets.

Update Friday March 29th: the first day of the re-opening appeared to evolve in an organized way. It seems that Cypriots have “accepted” the situation. The Guardian reported that Cypriots show patience and pragmatism, quoting several Cypriots and describing the mood in and around several banks across the country.

Cyprus has been preparing with never seen security staff. The security firm could not meet the number of people that were requested by the country in crisis. The Greek newspaper  Ekathimerini wrote yesterday:

A British security firm that transports cash for Cypriot banks is working round the clock, sending teams out with police protection to stock bank machines and readying guards for when banks reopen on Thursday.

The world’s largest security firm, G4S, moves cash and will provide guards for Cypriot lenders including Bank of Cyprus and Cyprus Popular Bank, the two biggest, which are to be combined and see large depositors’ accounts frozen under a bailout agreed at the weekend.

“Demand is greater than we can provide… We haven’t closed since the crisis started,” he told Reuters. “I’ve never seen anything like it in terms of what is going on from a security perspective. I would say the workload has quadrupled because the whole system has changed.”

“The staff will be based outside branches and are there to control queues, if there are any queues,” he said. “We will be in contact with the police. Basically it is to make the banking people feel safe and the customers as well.”

From a macro point of view, Moody wrote in an official announcement on March 27th that a Eurozone-exit of Cyprus becomes likely. The Grexit fear and fuzz is now being replaced by Cypro-exit.

While the risk of a euro exit by Cyprus is substantial… …following the economic dislocation that will be caused by the restructuring of the island’s two largest banks and the imposition of capital controls in the country, it is possible that the risk of euro exit will increase further.

On a microlevel, MarketOracle’s founder reports how a personal transaction to move funds from high risk euro-zone banks to low risk UK owned banks failed. He wrote: “Everything went smoothly apart form one transaction of early Friday afternoon for £16,000 which has gone awol. Now well over 60 hours later the funds have still not arrived.” (Source)

This illustrates the risks that the whole banking sector poses in that when it shuts down it will be in an instant, and then it will be too late to draw your funds out so you really need to act well before Financial Armageddon strikes. And certainly d not pay attention to any soothing words out of the Bank of England as illustrated by the fact that one of the last statements out of the central bank of Cyprus prior to freezing the banking system was that depositors money was safe in Cypriot banks.

On KWN, Jim Sinclair pointed out that the mainstream media has been focusing on creating fear on the confiscation of money in such a way to frighten people out of savings, with the aim to increase the velocity of money. With the velocity of money standing at its 50 years low in the US (representative for the rest of the Western world), Mr. Sinclair believes that special efforts will take place to increase the velocity of money “either by loss of confidence, or through the fear being generated by the mainstream media regarding the safety of leaving money in banks and other financial institutions.” (Source)

The spendings of the newly created money, which are trillions of euros and dollars since the big 2008 crash, in order to stimulate the economy (read: the GDP) is what the Fed and ECB were aiming for but did not get. The reason is very simple, and we explained all this before on Gold Silver Worlds:

The quantity theory of money (M x V = p x Y) is an equation in which the monetary base times the velocity of money equals price inflation times real GDP. Central banks use this equation for their monetary policies. It is the reason why one of their focus points is to influence the psychology (mood) of people: if people “feel” that everything is going well, they will spend more, raising the velocity of money and resulting in a higher gross GDP. Given the fact that the economies are not really producing more, for sure not in the in US and Japan, it implies that the central bank efforts to create inflation could very well result in a much higher inflation rate than targeted. While aiming for 2%, the result could very fast be 6%.

Indeed, the last sentence is an important one to note. If the velocity of money picks up, then expect a massive jump in the rate of inflation. We are close to that point, but the key here is that the behaviour of people remains out of control of the powers-to-be. For us, individuals, it remains a matter of being positioned to bear sudden and significant inflation.

Now how does all this relate to gold, the most underexposed topic related to Cyprus? It remains amazing how almost nobody is mentioning the fact that physical gold holders were the only ones not being touched by this historical crisis. Nick Barisheff wrote an outstanding view last night:

The frightening thing about lying is that it takes a thousand lies to support a single lie and yet truth, once seen, supports itself. This is the significance of the events in Cyprus to gold. What would happen were the Troika to make the same demands on the offshore banks of the Cayman Islands, or even the Turks and Caicos, as they did in Cyprus? First, they would discover billions of dollars they otherwise didn’t know about, and second, the Western investors who held money in these accounts would be outraged, just as Russian investors who used Cypriot offshore accounts were ….

Jim Sinclair added to it (Source):

“Right now the price in the market for gold is clearly not being made by the paper guys.  The price of gold is now being made by the physical buyers, and that is a quantum leap in change in the character of the gold market to the degree that I haven’t seen since 1979 … As we see an increase in the velocity of money, that is also extraordinarily bullish for gold going forward.”

Physical gold outside the banking system is what we have been advocating since our inception here at Gold Silver Worlds. In fact, it was THE reason why we have started this website. Today’s events confirm our vision was correct. Do you hold gold safely?

Previous updates: 10 Lessons Cyprus Is Teaching The World About Money & Gold | Newsflash: Wakeup Call From Cyprus To The Rest Of The World

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing