Cyprus Parliament rejected the proposed EU bailout package that would impose levies on bank deposits – an unprecedented move and unheard of in modern financial history. There was no surprises as Market did not truly anticipate Cypriot Government to bite the bullet. Nonetheless, the vote sent a strong statement – none of the voting members voted yes. 36 parliament members voted outright no while the remaining 19 members of President Anastasiades’s party abstained from voting. It seems that levy on deposits will not get any supporters within Cyprus in any form or means. If EU is bent on having Cyprus forking out 5.8 Billion EUR to support their own bailout, they have to think of other methods to raise the funds.
At the core of the crisis is Cyprus’s failing banks. The banking system has generally been well funded with deep liquidity, until recent Greece crisis which resulted in haircuts for their sovereign bonds put Cyprus banks under water. Ironically it’s the EU group that sanctioned and push through the haircuts, and is now imposing such onerous bailout conditions. Whether you agree that demanding levies on deposits is a reasonable demand, the fact that Cyprus need money remain. Other than turning to Russia for help, options are zero to none and now Cyprus is basically playing a game of chicken with EU. They are daring EU to stick to their guns and let them fall, which will have deep ramifications as investors will start to lose confidence in the Euro system if Cyprus exit the common-currency bloc. EU is unlikely to cave in immediately, as this will basically send a signal to Italy and Spain that they will be able to get cheap funding with little or no considerations – for the term “too big to fail” certainly applies to them. With so much at stake, this staring down contest is bound to last a little bit longer, and cutting closer to the ultimate dateline before Cyprus banks go bust.
All these will help to increase demand for Gold definitely – question being how much. Gold has traded above 28th Feb levels, the highest since March and current technicals suggest that price may still find interim support against pullbacks. However, it is pertinent to note that the sharp rally that we saw last night is BEFORE the Cyprus vote actually started. Price actually traded slightly lower as it became clear that Cyprus have blocked the move. That market appears to be relieve that the bailout package has been rejected, yet at the same time overall tension is high due to the inevitability of Cyprus banks failing without bailout funds.
Trend on daily chart is still clearly down. There is still possibility that current rally from Mar lows may grow into a strong reversal or perhaps a bullish revival instead, however currently evidences are still found lacking. Preferably price need to clear Dec swing lows and push above Jan highs for any strong long-term bullish contention. Fundamentally, a strong rally in Gold requires a catastrophic failure in current financial systems. Previously Gold rallied due to the perceived lack of value in USD due to easing efforts. The same fears can happen again if depositors do not feel safe about their deposits, and may instead choose to hold physical Gold which will be recognized internationally even without the backing of banks or sovereign countries. Certainly such thinking may be old-fashioned, or perhaps even bring us back to medieval times and the likelihood of this occurrence may be extremely low. But we’ve seen smart people from EU group coming out with the levy proposal and genuinely looking surprised at the reactions, hence it may be wise to prepare for all possibilities during such times of uncertainty.
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