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Cyprus Gold Bullion Sale

Is Gold Headed for a Long Run Down?

Written by Briton Ryle
Posted April 15, 2013

The smaller they are the harder they fall?? Cyprus seems to be at it again.

Not many weeks ago, the small island nation’s failing banking system rocked Europe’s financial markets. Now, its tumble seems to be sending shock waves through the precious metals markets as well.

india goldThe shortage of liquidity in Cyprus’ financial system is still unresolved. In a mad, desperate plight to raise cash, Cyprus took the unprecedented step of confiscating cash from large bank accounts of both citizens and foreigners in all its banks. Now it seems it may also sell its gold, like a once wealthy financier forced to sell his family jewels.

Just the speculation of a Cypriot gold sale sent gold reeling in the largest plunge since the 2011 fall from record-highs, falling some $80 last week (5%) to below $1,500 an ounce for the first time since July 2011, some 21 months ago.

For a small nation of barely 1 million inhabitants, this pint-sized munchkin can sure belt out a tremendous roar.

European Commission Demands

According to a European Commission document leaked to the media on Thursday, the EC has advised Cyprus to sell some of its gold in its continuing effort to raise cash.

The leaked EC document declares that Cyprus needs far more than the U.S. $22 billion once thought. It is now estimated to need U.S. $30 billion, some 36% more than previously calculated.

Of this new amount, the European Central Bank has demanded that Cyprus contribute U.S. $17 billion to its rescue package, with the ECB lending the remaining U.S. $13 billion, or €10 billion.

But traditional means of raising money in a hurry, such as the sale of state-owned corporations and the raising of taxes, import tariffs, and foreign transaction fees — including non-traditional means, like raiding bank accounts — are not going to be enough. Cyprus must crack open its vaults and sell some of its gold, so the EC document urges.

The consequences of such a move are already raising fears around the globe. Should other central banks of equally troubled nations do the same, they could force gold into a bear market which may take years to reverse.

More Harm Than Good

Yet the very notion of a Cypriot gold sale has been met by surprise, even outright ridicule. The entire Cypriot reserve is not even 14 metric tons — or some half million ounces — worth less than U.S. $750 million, a far cry from the U.S. $17 billion the country needs to raise.

It is not surprising, then, that Central Bank of Cyprus spokesman Aliki Stylianou readily denied the rumour of a gold sale. From GlobalPost:

“The decision to sell the gold is a decision to be taken by the board of the Central Bank of Cyprus. No such thing has been discussed or is in the process of being discussed. There are so many rumors flying about and this is just one of them.”

The fear that a Cypriot gold sale would trigger a cascading series of gold sales across Europe is likewise laughable, as it would be more damaging than helpful. Large sales would flood the market with excess gold, pushing prices lower, reducing the value of national reserves, and sending currencies careening into free fall.

It is precisely for this reason that bullion sales have not been common practice during these past 2 to 3 years of financial crises. In fact, during the last several years central banks have been net buyers of gold, not sellers, despite the fact that many are teetering on the brink of financial collapse.

It is highly doubtful that anyone would risk killing the gold market or one's own currency when emergency funds can still be raised through so many other means, including taxation, long-term bond sales, and international loans.

Were Lower Prices Induced?

This is striking up all kinds of conspiracy theories. A number of people laugh at the notion of a “leaked” document and reason that everything that reaches the laptops and cameras of the media has done so with purpose and intent. They see the Cypriot gold-sale rumor as nothing more than a scare tactic to induce one last great buying opportunity in gold.

Who would stand to benefit from a sudden dip in gold prices? Only those with deep enough pockets to keep buying a volatile commodity on the way down: central banks.

“Even as the price of the precious metal averaged a record $1,669 for [2012],” reported the New American, “central bankers bought more than 534 metric tons [in 2012] — the highest level since 1964 and 17 percent more than in 2011.”

If they considered gold a bargain at an average price of $1669, they will certainly consider it a steal below $1,500. Especially when they can currently sell some of their USD reserves at its currently higher price to buy gold at its currently lower price, effectively rotating some of their reserves out of USD and into gold in anticipation of a reversal of both their values in the future.

Gold Going Forward

It is important to note what the gold price is doing in different currencies. It may be sliding downward in USD, but in Japanese Yen gold has soared to all-time highs. Thus, currency changes are very much at play in determining gold’s price movement.

The recent fall in gold’s USD value can be attributed to a perfect storm of at least 3 important factors: a strengthening USD, a better return on investment in U.S. equities, and the recent scare of potential central bank sell-offs — of which Cyprus is only one.

When this current trend of rising equities, strengthening USD, and falling metals will ultimately reverse course is still not known. Perhaps the usual “sell-in-May-and-go-away” summertime sell-off in equities will finally trigger it.

Last year, the Dow was hit by two major sell-offs — a 1,300 point (9%) drop from May to June, and after rebounding from that, a 1,100 point (8%) drop from October to November. At that time, gold rose 16% from July to October.

This is extremely common, where traders sell an expensive gold to buy beaten down equities and later sell over-heating equities for a dejected gold when trends reverse. It’s just the typical relative value rotation, and that is simply what is happening now.

With financial crises still rampant and currency devaluation still on the agenda, one might expect more than just a repeat of 2012. One might expect a repeat of 2008, when one final dip below major support levels presented gold investors with the last great buying opportunity below $1,000.

Should gold’s correction this time be as then, we may very well find ourselves in the midst of one last great buying opportunity below $1,500 before ascending for another 2 to 3 years of successive all-time highs.

Whatever the result, this much is certain: the teeter-totters of the financial markets always adjust their slants. That which is high will come low; that which is low will rise high. It is simply the norm.

Joseph Cafariello

 

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