Cyprus lawmakers this week rejected a controversial euro bailout package, which would have set a dangerous precedent by taxing ordinary bank depositors to pay part of the bill. How will this situation impact the stock market? Will it make platinum any less appealing, especially relative to gold? Let’s take a look.
The genie has been let out of the bottle. The fact that a democratic government could propose such a plan is a game changer. Ordinary people everywhere now know that putting their savings into insured bank accounts is no longer a guarantee of a good night’s sleep. When governments are in desperate financial straits, they will not hesitate to plunder the accounts of ordinary savers and investors. And that make gold all the more attractive.
At issue was a plan for a one-time tax of 6.75% on bank deposits of less than 100,000 euros even though deposits are guaranteed (insured) up to that amount in Cyprus and in most other European countries. In addition, the government wanted to levy a 9.9% tax on Cyprus bank accounts with more than 100,000 euros, many of which contain Russian money. Russian banks and businesses have been flooding Cyprus for years, taking advantage of low taxes and loose regulations, and setting the laundering dial on the fast spin cycle. This decision would have penalized small depositors who are not responsible for the bubble and would have let off the hook the bankers, shareholders, and bondholders who supposedly assumed the risks. Worried investors everywhere finally got the point that gold is one of the few safe havens and gold went up $22.8 (1.43%) this week. On Tuesday, for the first time since February 6, gold was added to the trust for the SPDR Gold Shares ETF
Cyprus, like Iceland before it, has an outsized banking sector eight times the size of its economy, which indicates that money flows into its banks without any connection to the local economy. (In other words, possibly some tax evasion and a bit of money laundering.) Just for comparison, UK banks are only three times larger than the British economy and London is considered to be a global financial center. Cyprus banks were heavily damaged by exposure to Greece and now Cyprus' entire banking system needs to be capitalized.
Even by just having considered shaving the top of bank deposits, a psychological Rubicon has been crossed, raising some serious questions and issues.
The first is, why bother having a deposit guarantee if governments can expropriate your deposits? Even though policymakers claimed this would be a one-time event, how can one be sure? If this were to happen in Cyprus, could it not happen anywhere else in the eurozone -- Greece, Spain, etc.? Already there is a similar proposal being considered in New Zealand
. Without credible deposit insurance, it’s every person for himself or herself; all bets are off, and it’s a matter of how fast you can queue up to withdraw your money. With such low interest rates paid on deposits, isn’t it safer to stuff the money into the mattress or under the floorboard? And if that’s the case, instead of paper money that loses value, wouldn’t it be smarter to hold gold? Without the public’s trust in the banking system, the economy cannot function.
Cyprus is a small country of less than one million people. It joined the eurozone on January 1, 2008. That decision, to forgo sovereignty of its own currency, sealed its fate. Even though Cyprus backed down from the plan to tax deposits, just bringing it up as a possibility might have killed its status as an offshore tax haven. But that’s what got it into trouble in the first place. No one knows what will happen next, but none of the options are pretty. Cyprus's debt-to-GDP ratio pushed to 127% in the third quarter of 2012. Only Greece (at 153%) has a higher level. It is politically difficult to persuade German taxpayers to finance a bailout of an off-shore money heaven for shady deposits, and can you blame them?
So either Russia will come to the rescue with a fat check, or EU officials will relent when faced with the prospect of a Cypriot exit from the eurozone. Another possibility might be that the Cypriots tax the big accounts and spare the small, mostly local savers. Cyprus has no central bank to prop up its banks like a non-eurozone country does. So the last option is for Cyprus to exit the eurozone and to start printing its own currency.
Without a doubt, the Cyprus crisis is putting a spotlight on the general disillusionment with the European unification project.
Let’s move on to today’s technical portion to see whether the Cypriot events have had any influence on the general stock market and platinum (keeping in mind that platinum tends to outperform gold when stocks are rallying).
We’ll start with the S&P 500 Index
(INDEXSP:.INX) long-term chart. (Charts are courtesy of http://stockcharts.com
Click to enlarge
The situation is much the same as last week here
, as there has been insignificant reaction to the situation in Cyprus. It seems that investors do not view the situation as being important, but I think that it is – and I think that the true impact upon the general stock market is likely still ahead. Technically, the situation in this chart improved this week. RSI levels no longer suggest an extremely overbought condition, so higher stock prices could very well be ahead. Once again, Cyprus could be the game changer depending on what happens and how quickly the current situation is resolved.
Let’s turn now to the financial sector. We’ll use Broker/Dealer Index
(INDEXNYSEGIS:XBD) as a proxy here.
We see that the financials have managed to hold above the 2012 high despite the Cyprus events. This is a positive sign, but with RSI levels close to 70, further consolidation could follow anyway. If we are correct about the Cyprus’s impact still being ahead of us, then financials will likely move lower in the coming weeks.
Finally, let’s move on to the platinum to gold ratio.
Click to enlarge
On the above platinum to gold ratio chart, we see that the ratio moved below 1.0 this week but reversed almost immediately. It is now quite close to this very important support-resistance line. At this time, I view this recent move as a rather insignificant phenomenon, but I will continue to monitor the situation here closely, for if stock prices decline, the platinum market could be vulnerable. The outlook for this ratio still appears to be positive at this time, but keep in mind my comments from Wednesday:
The situation does look concerning for the platinum market as the platinum:gold ratio moves closely in tune with the general stock market -- and the positive outlook on the stock market was one of the factors that made us suggest moving from gold to platinum in the previous months. However, Cyprus could be a game changer. It's too early to tell if this should impact your platinum-gold selection, because there's not enough data and because of the plain fact that platinum is once again priced lower than gold, which is a 20+ year anomaly.
from a technical perspective, the situation in the general stock market improved this week. Stocks consolidated a bit and held relatively well as did the financials. From a pure technical perspective, I should be bullish here but would rather call the situation unclear, because the market appears to have not yet realized the true situation in the Mediterranean Sea. This outlook translates directly into platinum market, as the platinum-gold ratio tends to move in tune with the general stock market.
For the full version of this essay and more, visit Sunshine Profits' website.
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