by
GoldCore
Today’s AM fix was USD 1,243.50, EUR 902.79
and GBP 758.51 per ounce.
Yesterday’s AM fix was USD 1,255.25, EUR 912.05 and GBP 765.49 per ounce.
Yesterday’s AM fix was USD 1,255.25, EUR 912.05 and GBP 765.49 per ounce.
Gold fell $9.60 or 0.76% yesterday, closing at
$1,252.90/oz. Silver slipped $0.09 or 0.44% closing at $20.31/oz.
Platinum dropped $3, or 0.2%, to $1,381.75/oz and palladium rose
$1.05 or 0.1%, to $736.2/oz.
Gold
Prices / Fixes / Rates / Volumes – (Bloomberg)
Gold has found strong technical support at the
$1,200/oz level, which the yellow metal reached earlier this week on
speculators short-covering and physical demand in China. Premiums in
China have risen this week as Chinese New Year approaches and gold on
the Shanghai Gold Exchange (SGE) closed at $1,285.09 (see table
above) which was a $30 premium over spot gold.
Gold was down in London after retreating from a
three week high on speculation that the U.S. Fed will ‘taper’ and
U.S. lawmakers reached a budget agreement that avoided a government
shutdown. This funding expires on January 15.
The deal is actually bullish for gold as it is
extremely modest in size. Republican and Democratic
Congressional leaders unveiled an agreement to reduce the federal
deficit by $22.5 billion over 10 years while freeing up $63 billion
in government spending over the next two years.
It is important to remember that the Federal
Reserve is printing nearly $20 billion every single week. The U.S.
National Debt is now over $17.2 trillion and continuing to rise and
the U.S. has unfunded liabilities (Social Security, Medicare and
Medicaid) of between $100 trillion and $200 trillion.
U.S.
Treasury Amount of Outstanding Debt – Price/Billion – (Bloomberg)
Staggering numbers which suggest alas that the
U.S. politicians are rearranging chairs on the titanic.
These numbers alone should make people wary of
buying into the notion that gold will fall in 2014 as the dollar
strengthens due to the “normalisation of the economy.” The
economy is not normalising and the recovery is completely abnormal,
hence it will be wise to again ignore the publicised bearish calls of
certain banks.
New
EU Bail-In Agreement YesterdayThe
EU agreed new rules yesterday for bank bailouts or “bail-ins.”
The
new system will take effect from 2016 but emergency resolutions can
be brought forward in the event of banks failing in the interim
period. The “bail-in”
will require that shareholders, bondholders and importantly now
depositors will all suffer ‘haircuts’ or be burnt if a financial
institution is in trouble.
The European parliament confirmed in a
statement overnight that depositors with more than 100,000 euros
($137,000) would be bailed in after shareholders and bondholders. It
is important to note that the 100,000 figure is an arbitrary figure
and there is a possibility that this figure could be reduced by an
insolvent government faced with an imploding banking system.
The deal does not exclude the possibility of
public money being used “in exceptional circumstances,” the
parliamentary statement said.
The agreement was spun as a victory for
taxpayers, however the risks and ramifications of bailing in savers
including families with their life savings and the deposits of
already struggling small and medium size enterprises has yet to be
appreciated.
Gunnar Hoekmark, who steered the legislation
through the European parliament, said: “We now have a strong
bail-in system which sends a clear message that bank shareholders and
creditors will be the ones to bear the losses on rainy days, not
taxpayers.”
Gunnar forgets that savers are taxpayers too
and have paid taxes – on their income, on goods and services, on
capital gains etc – on their hard earned savings already. Indeed,
many are already paying punitive deposit interest rate taxes also.
There also appears to be a failure to realise
that deposits – including family’s life savings, retirees pension
incomes and businesses – are a vital part of the economy. You
cannot have consumption without saving. You cannot have business
growth and expansion and a consequent growth in much needed
employment without capital.
Many countries now accept the principle that if
banks get into difficulty, then it will not be the taxpayer but
investors and creditors including already hard pressed savers that
will suffer losses.
However, the situation regarding some countries
– notably the BRICs is less clear. The imposition of bail-ins in
western countries and not in BRIC and other nations would likely lead
to capital flowing to the non bail-in countries.
Therefore, rather than solving the banking and
debt crisis, bail-ins could ultimately compound the problem by
further undermining the public’s confidence in our banks and the
banking system.
What
Bail-Ins Would Look LikeWhile
bank bail-ins have not yet become commonplace, it’s worth examining
what a bail-in would
look like in practice. Some helpful insight comes from the Bank of
England, but more importantly, from the evidence witnessed in Cyprus
during its bank bail-ins.
The Bank of England recently extended the
Financial Stability Board’s Key Attributes guidelines and added
four practical steps to follow when bailing-in a financial firm.
These
four steps are Stabilisation, Valuation and Exchange, Relaunch, and
Restructuring:
•
Step 1 – Stabilisation
Stabilisation
is key, in that it reveals that international regulatory authorities
are leaning towards the well-used ‘weekend solution’ plan, to
which they actually refer as a ‘Resolution Weekend’
However, if the situation requires dramatic
intervention, they can even opt for a mid-week bail-in:
“Ideally a firm would enter resolution at close-of-business on a Friday evening, which would provide the authorities approximately 48 hours in which to stabilise the firm outside market hours. But this cannot be guaranteed. If a firm reached the point of non-viability during the middle of the week, it would be necessary to commence resolution proceedings at that point.”
“Ideally a firm would enter resolution at close-of-business on a Friday evening, which would provide the authorities approximately 48 hours in which to stabilise the firm outside market hours. But this cannot be guaranteed. If a firm reached the point of non-viability during the middle of the week, it would be necessary to commence resolution proceedings at that point.”
At the time of resolution intervention, the
regulatory authorities would suspend stock and bond listing of the
bank while making various announcements to the market. These
announcements would include details on which securities were being
totally wiped out, and which creditors, such as bondholders and
depositors, would have their bonds and deposits converted into bank
shares. The announcements would also, according to the Bank of
England, provide a timeline for the other stages of the bail-in and
seek to reassure insured depositors that they were protected while
attempting to provide “market counterparties with confidence”.
•
Step 2 – Valuation and ExchangeThis
step would re-value the firm, calculate its losses and capital needs,
and then write down creditors (including deposit confiscation where
necessary), while converting these creditors to shareholders before
embarking on relaunch.
•
Step 3 – RelaunchRelaunch
would relist the bank’s shares (and possibly some of the bank’s
bonds) and then allow the bank to re-open while implementing
restructuring.
•
Step 4 – RestructuringRestructuring
would aim to force the bank to appoint new management, change its
corporate governance procedures, and force it to operate in a way
that prevents subsequent financial market instability.
Although the Bank of England’s four step
bail-in approach is quite detailed, it does not address the capital
controls that would be needed so as to prevent a bank run. This is
where the Cyprus example becomes useful.
Capital controls were widely implemented in
Cyprus during a theoretical two week long ‘Resolution Weekend’.
Authorities knew that depositors would act rationally and attempt to
close their accounts or transfer their funds abroad, thereby causing
capital flight. To prevent this happening, draconian capital controls
were imposed and banks were kept shut for two weeks.
This was the first time that capital controls
had ever been imposed within the Eurozone.
Some of the capital controls included the following: Limits were imposed on bank withdrawals, foreign money transfers, and credit card transactions.
Some of the capital controls included the following: Limits were imposed on bank withdrawals, foreign money transfers, and credit card transactions.
Customers
could only withdraw a maximum of €300 per day from branches and
ATMs, and could only carry a maximum of €3,000 while travelling out
of the country.
In addition bank transfers over €5,000 needed
Central Bank of Cyprus approval, and foreign credit card transactions
were limited to €5,000 per month.
When capital controls are imposed on economies,
they usually remain in place for some time, for example, Icelandic
capital controls imposed in 2008 are still in place. Not
surprisingly, Cypriot capital controls are still in place and will
not likely begin to be lifted (in various stages) until early 2014,
according to the Cypriot President, or even longer, according to the
finance ministry. Controls on international fund transfers are
envisaged as being the final piece of the controls to be lifted.
The lessons from the Bank of England plan and
from Cyprus are essentially that depositors will not get any notice
that their bank is about to be bailed in. The bail-in would probably
happen during a weekend. The bank would probably not re-open on the
following Monday. There is also a strong likelihood that capital
controls would be imposed on the country’s banks during the bail-in
and for a lengthy follow-on period.
Given
this lack of warning, depositors need to plan in advance for the day
when ATMs do not work and they cannot access cash in their bank
accounts.
Download
our Bail-In
Guide: Protecting your Savings In The Coming Bail-In Era(11
pages)
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