Crisis and rogue waves never come from the direction and area you expect. They always comes from the fringe catching everyone off guard. While the equity and bond markets have been focused on problems with the PIIGS, Amagerbanken, a Danish bank, failed yesterday. One of the top 10 largest Danish banks, Amagerbanken had equity capital of 2.441 billion Danish Krona (approx. $440 million) as of September 30, but 4th quarter write downs wiped out the bank's capital and forced the Danish government to seize Amagerbanken under the new European rules implemented in October of 2010.
The importance of this action is that under the new rules, which protect taxpayers in the event of a bank bailout, bondholders will face haircuts currently estimated at 41%. Depositors who hold deposits in excess of the Danish guarantee of DKK 750,000 will see those deposits become claims in bankruptcy court. As of the 3rd quarter, Amagerbanken was thought to be a healthy Danish bank that had already recognized real estate losses. If the true extent of losses is in fact much greater, then what does this say about other Danish and European banks?
The ramifications for the price of gold are enormous. For the approximately 700 Amagerbanken depositors who now become creditors and will inevitably seek legal action to try to recoup their deposits above the guarantee, how many will now seek out the safety of gold in this time of stress and uncertainty? The market ignored this news on Monday but one can be sure that this is not the only problem bank in Europe and European investors will once again turn their eyes towards gold.
Since the beginning of the year gold has been in a pullback, consolidating last year's gains, and the daily and weekly technical indicators are beginning to turn positive. Investors would be well advised to add to their holdings on any additional pullbacks to the $1300 level and prepare themselves for a rally on increased uncertainty in the banking sector worldwide.
Disclosure: I am long DGP.
