Posts Tagged ‘cyprus’

The recent falls in the price of gold have been a puzzle; contradictory forces are at work.

The main trigger for recent falls has been talk that Cyprus is set to sell gold holdings. Yet the rationale behind Cyprus’s move is that it is virtually bust, and usually when countries go nearly bust, gold rises in price. A number of media reports has suggested that even money in our banks accounts is no longer safe, and that governments across the world are effectively insolvent. These are usually seen as reasons to buy gold.

Maybe the truth is that markets don’t believe all those predictions of doom. QE is usually associated with gold rising in price, but if markets think Japan’s QE will lift its economy, then that may be a reason to sell gold.

This article is really worth a read: 12 Rules of Goldbuggery  It’s a touch ironic. The bottom line, if you want the précis, is that gold bugs, as they call out-and-out fans of buying gold, are not totally rational . If gold falls in price they say it is because of market manipulation. Indeed they say if the markets were left to themselves gold would only ever rise. And they add that it is inevitable that the world will return to the gold standard.

Here is a thought about all this so-called goldbuggery. If the world did return to the gold standard, the global economy would soon afterwards descend into depression from which it would not exit until the gold standard was ditched. It is not true that inflation does not occur when the gold standard is in place. And it makes no sense to limit the money supply to the stock of gold, which is totally unrelated to innovation and economic potential. A return to the gold standard would kill innovation, crush change, and protect the status quo, making it easier for the rich to stay rich and harder for the poor to gain wealth.

Finally, Warren Buffet had something good to say about gold. “What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” or so said the wise man of investing last year. He added: “During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth — for a while.”

He also once said: “If you put your money into gold or other non-income- producing assets that are dependent on what someone else values that in the future, you’re in speculation…You’re not into investing.”

©2013 Investment and Business News.

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There is something very contradictory about the fall seen in gold over the last few days.

As of Friday, gold was down 22 per cent from its highs set in the autumn of 2011, when it passed $1,999 a troy ounce. That was the worst bear run since the early 1980s.

Yesterday gold fell 9.2 per cent, suffering its biggest one day fall since the early 1980s. At the time of writing, the pretty yellow metal is trading at $1361 a troy ounce, and is now 29 per cent off its 2011 peak.

The contradictions are many, however.

Markets have often bought gold when QE is increased. Yet in Japan, QE is being launched that will make previous programmes look like a warm–up. The markets are celebrating and in the process selling gold for a complex reason. The economy is not so good, therefore QE will be increased, and therefore the economy will improve, ergo buy gold.

Except the markets did not celebrate at all yesterday, and the Dow lost 265 points. Gold is usually seen as a contrary asset. Buy gold in times of peril. It is unusual for gold and stock markets to fall in tandem.

One explanation is that stock markets fell for transitory reasons, gold for more fundamental reasons.

Yet consider Cyprus. It is selling gold, and that has helped push down the price. But why is it selling gold? Answer: because the government is all but bust. Governments not having any money is usually seen as a reason to buy gold.

The last few days has seen worrisome news on the economy. Bad news on the US, and bad news on China have compounded fears over the European economy. Yet gold has fallen too. See: Has US economy hit a spring time wobble, or something more serious?  and China sees growth disappoint as India sees some promise 

In part gold has fallen as other commodities dropped. Brent crude oil, for example, fell to a nine month low this morning.
Capital Economics said: “None of the fundamental explanations being discussed for the slump in gold prices really holds up.”

Unless that is the explanation lies with inflation. Despite all that QE, and despite warnings of hyperinflation, right now global inflationary pressures are very modest. Maybe the penny has dropped. QE, at a time when banks don’t want to lend, is not likely to lead to significant inflation. That may explain falls in gold.

But here is another reason: gold’s allure is purely psychological. It does well because people expect it do well. It does badly because people expect it to do badly.

Impressions matter more than fundamentals. On the BBC this morning, David Buik called gold trading a spiv’s market. It rose a few years ago, because the global banking sector went into meltdown, and some feared a kind of race to the bottom in currency markets, and hyperinflation to be the result. Many of those fears now look hysterical. The mood has changed. Gold does not glisten like it did. And when investors think gold has lost its sparkle, it will fall regardless of what fundamentals say.

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The data was revealed a week or so ago. It is pretty clear cut. According to the ECB, the median wealth of the Spanish is 183,000 euros, 172,000 euros for Italians, 75,000 for the Portuguese, and a stunning 267,000 euros in Cyprus. In contrast, median wealth in Germany is just 51,000 euros.

So that’s it then. The problem is not that the poor old Spanish and Cypriots are being pulverised by the vicious EU, which is being prompted by Germany into punishing them for mythical misdeeds. Instead, the real problem is that poverty stricken German households barely have two cents to rub together.

The solution is simple enough: tax ‘em. Have a wealth tax. And where will it end? Will the meat in your freezer – beef, horse or otherwise – be seen as wealth and subjected to tax?

There is an alternative take. Writing in the ‘FT’, Wolfgang Munchau argued that the ECB survey was in fact being taken out of context. For one thing, he said median wealth is a meaningless guide. He said: “If you want to compare across countries, it is better to take the mean.” Mr Munchau suggested that if we use mean wealth as the guide, then Germany’s does not lag behind troubled Europe as much as the quoted data suggests. It is not clear that Mr Munchau is right here, however. After all, median data is the better measure for telling us the position of most people, and is not distorted by a small number of people with massive wealth.

But Mr Munchau made a more substantive point. Actually the differences in wealth are a symptom of the euro – that is to say, a Cypriot euro has less value than a German euro, hence Cypriot assets appear to be worth more.

Others question the limitation of the ECB data, and say it does not take into account savings in pension schemes.

But there are other more important points. For one thing, the ECB survey relates to asset values from a couple of years ago. Asset prices across much of troubled Europe have crashed since.

Besides we all know that in Germany the housing market is seen as less important. The Germans do not celebrate house prices going up – they mourn.

The data does suggest an interesting idea though. Is the reason the savings ratio in Germany is relatively high, and thus consumption to income relatively low, because Germans have less wealth tied in the home, and after a period of rising house prices, appear to have less wealth?

©2013 Investment and Business News.

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Where were you? Where were you when you heard about the death of Diana? Where were you when you heard about the release of Mandela? If you are more advanced in years, where were you when Kennedy was assassinated? There are certain things we never forget. If you are Cypriot, here is another question of that ilk. Where were you when you heard about plans to force all depositors in Cypriot banks to pay a levy to meet the costs of bailing out the economy?

Okay, the plan got revised to something not quite as unpleasant, but still pretty awful. All that happened three weeks or so ago now. Cyprus was left reeling, but its bad luck got largely forgotten by the media, and all that was left was a nasty taste, and renewed fears that the Eurozone is on a one way route to somewhere not very pleasant.

The European Commission did not forget, however. Its economists sat down and got on with the important task of revising their projections for Cypriot growth. Then the penny dropped. Because Cyprus has to contribute seven billion euros to its 17 billion euro bail-out, the economy will suffer. It revised projections for 2013 growth downwards from minus 3.5 to minus 8.8 per cent, and 2014 growth from minus 1.3 per cent to minus 3.9 per cent. These are nasty numbers – although some economists reckon its forecasts are too optimistic. Alas, if Cypriot GDP is going to be lower than previously expected, it will need a bigger bail-out. In fact the commission has worked out that Cyprus now needs six billion more than was previously thought, or 23 billion euros.

The European Stability Mechanism (ESM) and IMF had already agreed to contribute 10 billion euros to the original bail-out. Would they add to their funding? Errr no: they are staying put.

So that means Cyprus has to raise 13 billion euros, instead of the seven it was originally required to raise.

Do you see where this is going? If Cyprus has had so much difficulty working out how it will lay its hands on seven billion euros, and the resulting costs will cause GDP to slump even more than previously feared, how on earth is it going to rustle up 13 billion euros? And then what effect will that have on the economy, and how much will GDP contract as a result, and how much more money will Cyprus have to raise, and how much will GDP then contract as a result, and how much money will Cyprus then have to raise, and now much will GDP contract as a result, and then how much more money will Cyprus have to raise and…(shame the author is not being paid by the word, this example could carry on forever).

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Do you remember when Gordon Brown sold much of the UK’s gold reserves? Not a good move that, since the yellow metal soared in price soon afterwards.

Then again, back then gold was not fashionable. Keynes called it a barbarous relic, and for a while during the noughties, that description seemed about right. Could Brown have known how much things were going to change?

They did change, and gold became many investors’ best friend.

The thing about gold is psychology. You can’t do much with it, other than look pretty when you wear it – although it is a good semi-conductor. But because of gold’s history, and its presence in our psyche, it is seen as safe, really safe, safer than houses, as safe in fact as gold.

But the yellow metal has not being doing as well of late. Back in the summer of 2011 it was trading at about $1,900 a troy ounce, now it is down to around $1,560.

Maybe it is not so safe.

In recent years, the price of gold has been correlated with expectations of US QE. It was seen as a hedge against the dollar as much as anything. The Fed is not so QE friendly these days. The latest minutes revealed that many Fed members felt QE needs to slow down.

But consider this point of view. If gold can’t do much, in times of really big trouble when we need money, why hold on to it?

The combination of austerity, lack of QE and sovereign debts in the Eurozone is combining to tempt many countries to sell their gold.

Cyprus is selling 400 million euros worth. It needs the cash, for obvious reasons. For almost as obvious reasons, it may have timed the sell-off perfectly.

Will other countries follow suit? Is gold going back to being a barbarous relic?

©2013 Investment and Business News.

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“The lady doth protest too much, methinks,” said the Queen Gertrude to Hamlet. Maybe Uros Cufer, Slovenian finance minister, said something similar. He said “We do not have to go to the markets in these overheated times due to Cyprus…We can wait for the markets to calm down, for the investors to feel comfortable about our action and then we will tap the market.” Pressing home his point he also said: “We will need no bail-out this year….I am calm.” And just in case you are still in doubt he also said: “Slovenia cannot be compared to Cyprus. It is certainly not a tax haven… the basic problem of the banks in Slovenia is too much debt in companies and a lack of capital.”

Hamlet had tricked Queen Gertrude. He suspected she and his stepfather had colluded to murder Hamlet’s father. He staged a play to see how she would react to scene in which a woman promises her husband that if he died she would never remarry. Hamlet asked his mother what she thought of the play so far and she replied: “The lady doth protest too much, methinks.” In Elizabethan times the phrase actually meant: “I think the lady is promising too much.”

English lesson over. It matters not. Does Mr Cufer protest or promise too much? It boils down to much the same thing. The markets are fretful; they think Slovenia may be next. Whether next means next to the gallows, to the IMF, or to something else, is not clear.

In one sense though, Slovenia most certainly isn’t Cyprus, or Portugal, Greece, Spain, Italy or even France.

Slovenia’s gross government debt at the end of 2012 was around 52 per cent of GDP. Only three Eurozone countries had less debt. Its unemployment level in February was 9.7 per cent; that is high, but then again it is below the Eurozone average. Slovenia is different in one other way. It is exporting more than it is importing, and is expected to enjoy a current account surplus worth around 3 per cent of GDP this year. Across the euro area, only The Netherlands, Luxembourg and Germany are expected to see a better performance than that.

Slovenia’s problem is that its government debt is rising – the fiscal deficit has been around 5 per cent of GDP every year since 2009, and is forecast to fall only very slowly. Bank liabilities are more than 100 per cent of GDP (much less than Cyprus but still very high) and bank lending to households and business is around 85 per cent of GDP. The country is stuck in recession, and is likely to stay there this year.

Now some might look at those fundamentals and say Slovenia is a bit like the UK, only thanks to its trade surplus in some ways it is better off. It is just that the markets see the UK as a safe haven, and the government can borrow money so cheaply it is a wonder it doesn’t do so more often. In Slovenia bond yields are approaching levels that in the past and in other countries precipitated asking the IMF for help.

The markets are demanding austerity when what Slovenia needs is more demand. And that is why Mr Cufer may indeed be promising and protesting far too much.

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And so it came to pass that the Cyprus parliament was not happy and rejected what was possibly the maddest idea ever put forward to bail-out a country. The vote was a close run thing, with 36 members of the Cyprus parliament voting against the bank levy and 19 abstaining. The number of MPs voting for the proposal reached a grand total of zero.

Good for Cyprus. Now it has to decide what to do next.

It could do a lot worse than consider the lesson of Iceland. In 2007 Iceland’s GDP was 1.293 trillion kronor. In 2008, its external debt was 9.533 trillion.

You may remember that when the scale of Iceland’s problem emerged, and when the UK press found out that UK citizens and local authorities had exposure to Icelandic banks, the country was made to do the walk of shame. Its representatives were hauled up by the British media: “Are you ashamed?” they were asked, and: “What are you going to do about our money?”

The UK used anti-terrorism legislation to freeze Landbanki assets. This was not a move that endeared Britain to the Icelandic people, but maybe the UK felt it had an opportunity to exert revenge over the cod wars, and the Viking invasions before that.

Back in January of this year, the court of the European Free Trade Association – one of those cursed EU courts that should be banned because it tries to consider all points of view and not just the UK’s position, or indeed the position of the UK tabloids – ruled in favour of Iceland over the UK and Holland. Its decision means that the little island to the north west corner of Europe will repay the money it owes to the UK and the Netherlands gradually, and under its terms.

Today, Iceland and its people are still suffering. But then again, it has enjoyed seven successive quarters of growth. It is not easy repaying debts when the money you owe is valued in a foreign currency and the currency in which you receive your salary crashes. Iceland was pretty much left high and dry by the international community (you are on your own mate, was the general feeling attitude in the UK). The IMF did loan out money, but as usual under terms that were very painful. Iceland eventually responded by having bank loans to its citizens valued in foreign currencies declared illegal. Other legalization enabled many homeowners with negative equity to write-off much of their debt.

Ironically, Iceland may yet see a pretty sensational turnaround, and become one of the wealthiest countries in the world on a per capita basis thanks to its one of the island’s most famous natural resources, but one we don’t usually think of as resource at all. Plans are afoot to pipe heat from Iceland’s volcanoes and lava flows, and – via the magic of thermal energy – heat northern Europe. Iceland may yet have the answer, or at least a partial answer, to the energy crisis, and one that does not risk exacerbating global warming.

Iceland also has rather a lot of something else. What is it now? Oh yes, that’s right, ice. Maybe it could use that to cool down the Sahara – all we have to do to achieve that is to solve the minor problem of working out how to transport ice a few thousand miles without it melting.

Cyprus has neither ice nor lava, but it does have a lot of natural beauty.

Its future will be best served outside a Eurozone that has completely failed to come to its rescue in its hour of need. It may be better off with a cheaper currency, and laws designed to protect its citizens over the interests of foreign investors, whilst at the same time welcoming foreigners who can boost its economy. Best of luck to you, Cyprus. Anyone fancy moving there?

©2013 Investment and Business News.

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