Cypriot Banking Crisis – A Turning Point for Your Portfolio?

Louis James, Chief Metals & Mining Investment Strategist

Archimedes once said that if he had a lever long enough and a place to stand, he could move the world (Greek: δῶς μοι πᾶ στῶ καὶ τὰν γᾶν κινάσω). Today, the half-Greek island of Cyprus appears to be the fulcrum, and the long arm of the EU may be the lever that heaves the entire world over the edge of the abyss.

As Dennis Miller so eloquently pointed out last Friday (in Just Whose Money Is It Anyway?), most Americans would not be directly affected if North Dakota decided to seize citizens' money in order to pay its bills, but all Americans would be deeply disturbed by such an action. The principle of the matter couldn't be clearer; outright theft is wrong. But it'd probably be fear, not principle, that would have people heading for their banks in droves to withdraw cash as fast as possible.

Of course, on a moral plane, government money printing is equally reprehensible and cowardly to boot; it takes value out of people's savings just as surely as taking money out of their bank accounts, but in a hidden, indirect way. (One could make the same argument of taxation in general, unless it's voluntary.) But again, most people won't storm the Fed with pitchforks and torches as a matter of moral rectitude. They would, however, if the government simply reached into their bank accounts and seized money those people had planned to spend tomorrow.

And if North Dakota's hypothetical troubles were mirrored in other, much more populous states, like New York and California, it's easy to see how people in those states wouldn't want to wait for their governments to do the same thing. This is the abyss toward which the EU's hard line with Cyprus has pushed all of Europe.

Europeans living outside Cyprus should not kid themselves that this is just a Cypriot problem – anyone with a bank account in Greece, Spain, Italy, etc. should be thinking very hard about how safe their cash is from confiscation. As we go to press, the Cypriot parliament has backed away from the bank levy on everyone that caused so much uproar, but the new deal still seizes money from larger depositors. This does not undo the fact that it’s still stealing – nor that the ECB asked for some of every citizens’ savings. Europeans living in non-PIIGS countries should not kid themselves about the impact on themselves if the countries near default tumble like dominoes.

And people not living in Europe should not kid themselves into thinking that this is just a European problem; in today's global economy, every country would get hurt by a banking and economic collapse in Europe. Those who think Asia will save the world must remember that the EU is China's largest trading partner. Or was – who can say it will be tomorrow?

Key point: with a fractional reserve banking system, it doesn't take a majority of bank depositors to decide to withdraw their cash to put their banks out of business. If something like 10% of depositors decided to withdraw all of their money, banks would be in real trouble – and even if only a smaller percentage were to initially decide to keep their cash at home, they could spook the required fraction into panicking and pushing the banks into insolvency. In stable times, fractional reserve banking may seem like free goodies for all, but during unstable times, it makes banks that much more precarious. Things have to be pretty dire for an entity like the ECB to demand action that could spark such a panic.

But wait – the banks are backed by the governments, so depositors are safe, right?

Yeah, right – the same bankrupt governments that are facing insolvency themselves…

Is This "IT?"

We've been saying for some time that the global house of cards could topple at the slightest rustling of the wings any of a number circling black swans. Something like the ECB turning draconian with Cyprus and scaring the heck out of everyone else in the EU seems more like a swan dive right into the heart of the teetering structure.

Many mainstream commentators are dismissing the significance of the Cyprus debacle – but the same type of people also dismissed the threat of the subprime crisis until it could no longer be denied.

This does not prove that what's happening regarding Cyprus today is the tipping point future historians will point to as the beginning of the end of the EU and hence the rest of the old economic order. But it could be.

Skepticism from the mainstream does not prove that Doug is right about the global economy exiting the "eye of the storm" this year, but it's a great contrarian indicator.

What is absolutely clear is that the extreme measures the ECB has just shown it is willing to take are solid evidence that we are right about just how shaky things are – just how close to the crumbling edge of the abyss the whole world is.

Even if the direct, overnight theft of Cypriot bank deposits does not spark a bank run across Europe, it won't change this fact. The ECB will certainly admonish us all to "pay no attention to the man behind the curtain," but we've all seen the truth.

The question to ask is not, "How can we be certain?" That one's easy to answer: we can't be. The question to ask is, "What do I risk if this is it and I fail to prepare for the hell that's coming two steps behind?"

To Doug, me, and all of us here at Casey Research, the answer to that is obvious: if we bet on the resumption of the economic storm and the so-called recovery continues, we'll miss some opportunities and maybe lose some money on investments that don't work out – but if we don't make that bet and the economy does come unglued, we will suffer heavy losses.

If – Doug would say "when" – the wheels fall off the economic "recovery," the vast majority of people will see a substantial reduction in their standard of living – and many will simply be wiped out. We don't plan to be among them.

What to Do?

You've heard most Casey recommendations before, at least in general terms, but that doesn't make them any less true or important now... indeed, just the opposite, if the inevitable has now become imminent.

  • Liquidate: Sell or dispose of any assets you have that might have been favored by the old economy, but are unlikely to hold value or generate income in the new one. That includes speculative real estate holdings in formerly hot markets and stocks in formerly invulnerable blue-chip companies. You might even sell your house, if you can, and rent instead. You should lighten your load in every way possible – even household junk filling your basement and attic – the storage unit you may be renting – anything you don't truly need. Turn it into cash.
     
  • Consolidate: Cut your expenses to the bone and consolidate your assets into things that will hold value come hell or high water. The single best asset class for doing this is the precious metals: gold and silver. A substantial amount should be in cash form (coins). This is where you put your savings. Productive (not speculative) real estate is also good, but make sure it's in a jurisdiction that is unlikely to see you as a victim to be fleeced for the public good. As Doug constantly reminds us, a critical element is getting a major portion of your assets offshore.
     
  • Speculate. With governments around the world on the verge of insolvency, most of them printing money by the helicopter-load, there are predictable economic consequences. Massive bubbles will be created, such as the one we see ahead in precious metals, and other bubbles will pop, like the collapse of more major corporations. There are no safe bets in such an environment (even gold can be confiscated if you leave it all in a jurisdiction that turns to stealing, as the EU has just shown it's willing to do), so you're better off speculating on a variety of bets placed on these trends. It's possible in such volatile times to make a lot of money – this is the raison d'être of most of our publications. How to profit from the coming mania in gold and silver is the main focus of our BIG GOLD newsletter, and how to shoot for spectacular returns is our goal in the International Speculator.
     
  • Create: Despite all of the above, we are not apocalyptic, but actually quite optimistic, about the long term. In the coming years, the world is likely to change as radically as it did entering the industrial revolution – major change will impact everything: economy, politics, technology, demographics, social customs and mores, the military. Everything. This is a good time to look around and ask yourself what goods and services you can provide that people will need in the future. What worked during the late Long Boom won't work in the future – in order to create, you're going to have to think creatively, but it will be worth it. Life today is immeasurably richer than it was a thousand years ago, and in 100 years it will be better by a factor beyond our ability to comprehend. Maybe even 50. And in just 25, it will be beyond most people's belief. Become a forward thinker, or become road kill.

Personally, I just sold my sports car and consolidated down to one vehicle. We really didn't need two, and I'm using some of the proceeds to speculate on an emerging gold producer that has the potential to return ten times my investment. I plan to speculate on more great companies in the months ahead, especially if the market goes into a true panic, which it has not yet. Saving in gold has long been my practice, so that's nothing new for me. As for the future, I plan two things: A) invest in technologies and companies I believe have great potential, starting with some of those covered by the Casey technology division; and B) work hard to keep myself from becoming obsolete.

Do not underestimate the importance of the latter; there is medical technology right around the corner that could drastically prolong the human lifespan. Everyone not at death's door should have at least a 25-, if not 50-year financial plan. This, in my view, makes the addition of our new income letter, Miller's Money Forever, as timely as it is important.

How to Become a "Downturn Millionaire"

It's the "speculate" component of Doug's "liquidate, consolidate, speculate, and create' formula that most people have the most trouble with.

We've said many times that the essence of speculation is to buy low and sell high. The best way to do that is to buy when there's blood in the streets – which is what is shaping up in the market now. Despite persistently high metals prices, there's panic in the air, and few are willing to buy. It's at times like these, when "everyone" has given up on a commodity, sector, or asset class that cannot dry up and blow away – like metals and mining – that you can buy at "stupid-cheap prices."

We have documented and commented upon the weakening market for metals and mining stocks, particularly gold stocks, in these dispatches for some time now. We've pointed out the widening gap between the value the market is giving to good companies and the commodities that underlie them, such as gold, which has traded sideways, not down, over the last year – and at a price point previously deemed unsustainably high. It is clear to us that a potentially life-changing buying opportunity is shaping up today, and it may just be the Cyprus black swan that turns out to be the tipping point in our favor.

Now, no one can time a market bottom, except by accident. But when you can buy something that has to go up when it’s selling cheap, you can make a lot of money – if you have the patience to endure until it does go up. In the case of mining stocks today, we don't think that patience will be required for a long time, but it will have to hold up to extreme volatility in the near term.

This is, frankly, not a viable plan for everyone. People prone to panic when stock in a good company drops 30% for no reason often end up inverting the speculator's formula, buying high and selling low. But for those who have the discipline to stand by their judgment of what has value, regardless of what the rest of the market is saying, it's times like these that create the most leveraged buying opportunities – opportunities that literally set the foundation for accumulating serious wealth.

The nature of success and failure in speculation: discipline and perseverance matter much more than strength or speed. It's necessary, but not sufficient, to be right – you have to stay the course.

Key point: There's a clear and present opportunity we see in the Cyprus crisis, which has already given the price of gold a shot in the arm. However it turns out, the cat is out of the bag as regards how the EU regards peoples' savings, and that could lead to the next leg up in the gold market. If the whole system does topple over the edge of the abyss, it should spark a gold mania such as have never been seen before, not even during the famous spike of 1980.

In response to this opportunity, the Casey Brain Trust has created a webinar explaining the details on what steps to take to profit from the current downturn. Whatever subsequent actions are taken or not taken, I strongly encourage all our readers to tune in to this valuable – and free – online video event, titled Downturn Millionaires.((Link to DM landing page)) It could easily turn out to be the most valuable event you'll attend all year.

And whatever you do, don't forget: liquidate, consolidate, speculate – and create!

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research

Rock & Stock Stats
Last
One Month Ago
One Year Ago
Gold 1,613.80 1,572.80 1,642.50
Silver 29.21 28.46 31.35
Copper 3.44 3.53 3.77
Oil 92.45 93.13 105.35
Gold Producers (GDX) 38.16 37.93 48.75
Gold Junior Stocks (GDXJ) 17.00 16.21 24.00
Silver Stocks (SIL) 18.27 18.70 22.13
TSX (Toronto Stock Exchange) 12,757.35 12,701.63 12,361.81
TSX Venture 1,106.35 1,144.68 1,540.75


Gold and Silver HEADLINES

Arizona Could Soon Approve Gold and Silver as Legal Tender (Mineweb)

Arizona may become the second US state (after Utah) to recognize gold and silver as legal tender. If SB1439 gets approved by the Arizona House and signed into law by the governor, gold and silver will acquire legal-tender status, defined by the state as a mode of paying debts and taxes.

"The measure also states that any coin or bullion that has gold or silver content and is issued by the United States Government can be defined as legal tender. However, no one can be compelled to accept coin or bullion containing gold or silver. The measure would also mandate that coin or bullion containing gold or silver issued by the U.S. Government cannot be taxed as property since it is to be considered money,'” Mineweb reports.

This issue has been under consideration in three other states (Virginia, South Dakota, and Indiana), but none have yet approved the suggested measures. As straws in the wind, however, these are quite telling.

Massive Increase in Chinese Gold Reserves Unlikely (Mineweb)

Vice Governor of the People's Bank of China (PBOC) Yi Gang has said that the country's gold reserves currently stand at roughly 33.9 million troy ounces, and that there is no intention to increase them significantly in the future. "More gold is always an option, but that requires profound judgment," Yi Gang said.

We think it's more important to look at what China does than listen to what its leaders say.

Why does it matter? Because, compared with China's US$3.3-trillion foreign exchange reserves, the size of the whole global gold market is fairly miniscule. An increase in China's gold reserves would signal that the PBOC is bullish on gold and provide reliable support for the metal's price.

Earthquakes Make Gold Veins in an Instant (Nature)

A new study states that gold deposits can be created almost instantaneously during earthquakes — possibly within a few tenths of a second. What appears to happen is that a rapid depressurization allows the normally high-pressure conditions deep inside to become close to the surface pressure. When hot, mineral-laden water experiences this sort of pressure drop, the water vaporizes almost instantly, leaving the minerals to crystallize in a process engineers call "flash deposition."

"The process takes place along 'fault jogs' — sideways zigzag cracks that connect the main fault lines in rock” said first author Dion Weatherley, a seismologist at the University of Queensland in Brisbane, Australia.

Since fault systems with lots of "jogs" may host gold, the study suggests that miners might be able to use remote sensing techniques to find new gold deposits in deeply buried rocks where fault jogs are common.

The idea of instant deposition is exciting, but seems unlikely to change mineral exploration much; geologists already look for these sort of jogs – dilation zones – and recognize that changes in temperature and pressure cause dissolved minerals to settle out of fluids moving through spaces created by faulting. Still, it's always good to see our understanding increase.


This Week in International Speculator and BIG GOLD – Key Updates for Subscribers

International Speculator

  • A major mining company provided important financial and credibility support to one of our exploration-stage companies, via a large private placement. The funds will be used to extend a drill program, previous phases of which have delivered spectacular results.

BIG GOLD

  • Lots of BIG GOLD news this week – check out the latest on your favorite companies, along with our comments, on the BIG GOLD portfolio page.
Mar 25, 2013
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