Wednesday, August 16th, 2017 MST

Gold and silver surge as European banking crisis unfolds

The dollar is a favorite refuge for money seeking safety as the European banking crisis again dominates financial news.  Consequently, 10-year US treasury bills are now yielding a record low of 1.39% as money pours into them.  (As bond prices are bid higher, yields drop.)

Germany, Europe’s strongest economy, is seeing its bonds sell at negative rates. (Buy a German bond, hold it to maturity for a guaranteed loss!) German bonds are also the European Central Bank’s preferred vehicle for its €80 billion a month quantitative easing program.

In this flight to safety, gold and silver have benefited as well, with gold up $160 since May 30, and silver up $4.00 for the same period.  The primary driver for the rush to the metals is recognition that “bail-ins” are possible actions that European governments may take in attempts to resolve the banking crisis.

gold graph 2 7.16.16

silver graph 7.6.16

Bail-ins come about as governments force banks to “hair cut” deposits, which means that savers who have their money in European banks may be funding the banks’ recapitalizations.  Italy, Europe’s fourth largest economy, is the basket case.

Estimates have the Italian banking sector with €360 billion in non-performing loans.  Although there is a plan afoot to rescue the banks via a “government sponsored but privately backed fund,” bail-ins are still feared, and money is moving into gold and silver as well as US treasuries.

In 2013, bail-ins were first employed in Cyprus.  Except for the keenly observant, the Cyprus bail-ins have been pretty much forgotten.  According to Zero Hedge, Canada, New Zealand, the US, the UK, and Germany have implemented legislation that would allow them to first freeze and then seize bank assets during a crisis.

Considering that US treasuries are promises to pay by a government that has $19 trillion in official debt obligations and more than $100 trillion in off-balance sheet liabilities, gold and silver remain favorites for people who know the sad history of paper money, which is that governments print it until it is worthless.

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