I read a short piece yesterday penned by Greg Orrell, President of OCM Gold fund. He summed up in a nutshell that “ZIRP” and following the “rule of law” when winding down a bank(s) cannot exist together. The “rule of law” being that when you deposit money in a bank and exceed the insured amount the old saying “you pays your money… you takes your chances” now is the new rule. Which is apparently what has happened in Cyprus (though it looks like the Russians may have used last week to transfer their balances). If you deposit more than the insured level… your money is at risk… as it SHOULD BE.
As banks blew up in the U.S. and all over the world for that matter, they would be merged and papered over so that no one ever lost one red cent. This is not the way it used to be and not the way it should be… but it is what our banking system morphed into… because it had to. It “had to” because if a bank could fail and depositors could lose money then “bank runs” would be an issue. Bank runs were taken off of the table after Northern Rock and were not an issue… until now that is. Depositors in Spain and Italy are already putting their tennis shoes on and readying to run but that’s not what I want to talk about today.
What is now in play is that if you have money in the bank and are getting a whopping .1% interest… it compensates you for what? It compensates you for NOTHING that’s what! It doesn’t compensate you for the real world inflation that we are told everyday by the statisticians that doesn’t exist, nor does it compensate you for the other risk. The “other risk” (that did not exist but now apparently does) being that your bank might go under and balances over the insured limits are not covered. It’s simple “risk versus return.” If risk goes up (which it now has) so must return. And this is the problem.
The world cannot have a zero interest rate policy AND a banking system where very real risk exists. Interest rates that banks pay will absolutely have to rise to compensate for this “newly discovered” risk. But how can a bank pay you 3, 4, or 5% on balances if the best that they can get on “risk free” parking money is .25%? They cannot. What I think is being missed in the market place is that the “risk” of bank runs has greatly increased because our Pinocchio banking system has finally decided to follow the rule of law. Why now? That’s a matter of debate for another day but the decision to follow the law has opened Pandoras box that was shoved in the corner and forgotten about.
This “new” risk of potential deposit loss is now added to the “old” risk of the currencies themselves where purchasing power is lost. In other words, investors now have another reason to run! But where to run? Another or multiple banks? Stocks? Bonds (really dumb with interest rates where they are now)? Real estate? Precious metals??? You obviously know what my thoughts are already but let me briefly sum up.
Gold IS money. It is not an investment, it is not currently used as a currency (but can and surely will be used as one). “Gold pays no interest” has always been the knock, but… neither do bank accounts nor does currency. What has now been introduced publicly is (and has) always been present… namely that gold can neither be debased (except by COMEX and ETF’s) NOR can it default. This new “default risk” that depositors have to “adjust” for will be in my opinion the catalyst that sends gold (and silver) into orbit. Once the “runs” begin (and they surely will) in earnest, gold will be priced far above where the average person can even afford to purchase in any significant “weight”. Then it will be silver’s turn because it’s “cheaper” …because when it’s all said and done it will all be about “weight” as opposed to the “wait” to see whether or not your bank still has money left by the time you get to the front of the line!