Savers with funds in banks got a wake-up call from the Cyprus bailout deal reached with the EU last week. Under terms of the deal, savers with more than 100,000 euros ($129,000) basically lose the uninsured amount over €100K. Banks in Cyprus were kept closed going into the second week for fear of a run on banks from fearful savers wanting to get their cash out.
“The Popular Bank of Cyprus (better known as Laiki) would effectively shut down, with insured deposits of less than €100,000 transferred to the larger and more stable Bank of Cyprus. Uninsured deposits at Laiki could be frozen and used to pay down bad debts, meaning they could be partially or completely wiped out,” Simone Foxman reported for Quartz.
It’s not clear yet how long it will take to sort out the mess. But what is clear is that big depositors will probably take a heavy hit in what amounts to government-sanctioned theft. Depositors in other countries, especially those in at-risk countries like Greece, Italy, Spain, and Portugal, may get spooked and make a run on banks in those countries.
Business in Cyprus has been severely hurt as some firms are faced with a cash crunch and cannot pay salaries or suppliers. Retail business has also suffered as consumers hold dearly to their cash because they aren’t sure how all this is going to play out.
The long term fallout from the treatment of savers may prove to be a huge catalyst for gold as people in Cyprus and other countries fear confiscation of funds held in banks and seek a safe and secure asset like gold coins and other precious metals to preserve their wealth. The sudden and surprise confiscation of savings in Cyprus underscores the need for investors and savers to truly diversify their assets and not put all their eggs at risk in one basket.
“If you are a depositor in a European bank, you now have every incentive in the world to move your money somewhere safer, or even to keep it in cash, the minute you detect any hint that your nation could end up in the same place Cyprus did. The next time there is a banking panic in Europe, it will move much faster, and be much harder to control, than those of the recent past, as depositors try to get ahead of future losses and capital controls. And that’s a scary proposition indeed,” wrote Neil Irwin in The Washington Post.
Texas Considers Its Own Gold Depository
For Texans, Fort Knox is not good enough. Texas Gov. Rick Perry wants to establish a gold depository within the state’s ample borders. He has legislative support for the idea. Freshman Rep. Giovanni Capriglione, R-Southlake, is carrying a bill that would establish the Texas Bullion Depository, a secure state-based bank to house $1 billion worth of gold bars owned by the University of Texas Investment Management Co., or UTIMCO, and stored by the Federal Reserve.
Perry told Glenn Beck recently that the state is “in the [legislative] process” of “bringing gold that belongs to the state of Texas back into the state.” Perry said that the state is at least as capable as the Federal Reserve of safeguarding Texas’ “physical gold.” “If we own it,” Perry said, “I will suggest to you that that’s not someone else’s determination whether we can take possession of it back or not.”
Rep. Capriglione said, “We’re trying to figure out the right amount of gold to have here in Texas…We don’t want just the certificates. We want our gold. And if you’re the state of Texas, you should be able to get your gold.”
“For us to have our own gold, a lot of the runs on the bank and those types of things, they happen because people are worried that there’s nothing there to back it up,” Capriglione said. “So I think this cures a problem before it can happen.”
Capriglione noted that transporting so much gold would be challenging from a security and logistics standpoint, so he believes the best way to do it would be to sell the state’s gold held elsewhere and repurchase gold from sources within the state. He maintains it would not be a major expense because the gold bars could be held safe in a small area no bigger than 20 square feet.
Former Texas Congressman Ron Paul, long a critic of the Federal Reserve system, has been stumping for years to look after the security of the state’s gold. “If you think gold is a hedge, or a protection, you always want it as close to the individual and the entity as possible,” Paul said. “Texas is better served if it knows exactly where the gold is rather than depending on the security of the Federal Reserve.”
I hope all of these politicians will take the time to consult with gold and depository experts in Texas about these matters.