Gold, Euro Problems And Currency Politics

by: Emmet Kodesh

The Cyprus bank crisis exposes the risks of highly leveraged and inflated currencies. The ECB and Cyprus will digitally cover this problem lest the island become a Russian colony which would tilt all issues in the Levant and Middle East. It would greatly impact all commerce. Solvency problems, shrinking growth and demographic crises in Europe will roil markets and speed transition to a new monetary order. The crisis boosts the $ and Yuan (NYSEARCA:RMB) which like precious metals are set to rise with the new reserve basket of currencies.

The Savings & Loan crisis of the 1980s and the collapse of Lehman Brothers are not ancient history. The latter led to the unprecedented expansion of US monetary base. JP Morgan's derivative exposure is about $450 T and impossible to cover. The Attorney General has stated on the record such banks cannot be prosecuted. So issues in Cyprus are a valuable window on structural problems in fiat currency economies.

Taxing bank depositors to pay for bad loans "proved enormously controversial across Europe" since people in Italy, Spain, Greece and Portugal fear they will be the next to pay as the Irish did, taking on the debt of their banks per the ECB. Iceland's option, punishing some banks and letting foreigners take a loss seems like a one-and-done event. The era of resentment is here: some say Cypriots deserve to be punished because their banks pay higher interest, and they pay lower taxes than others. Such comparisons mark an invidious trend. They also distract from an important debate. Cyprus does not tax dividends or capital gains on foreign investment. If DC wanted to grow America's economy, a 5-10% graduated rate on such income would spur investment, hiring and help seniors on fixed income as would capping corporate taxes at 12%.

For five years, the major central banks have created debt currency to float banks and increase the size, expense and power of government. Suppressing interest rates impoverishes savers and those who rely on fixed income. The juice lifts equities but inflated values mask economic problems resulting from policies that encourage speculation while hampering investment and hiring. Equity prices have soared on liquidity while debt / insolvency issues swell. On March 20, Mr. Bernanke made a point I have stressed: the DOW's nominal highs do not mean the economy has recovered. The Chairman thus did not merely justify extended QE but also sounded a cautionary note about growth. The Consumer Confidence Index continues the bottom crawl in place for six years. Inflation-adjusted index levels show 2009-13 as a cyclical oft-punctuated rise within a secular bear market that began after the crash of 2000. This will continue to lift gold despite its secular basing.

Manipulation of the LIBOR added to structural problems in state, county and municipal bonds and pension plans and deficits. These large discords cannot be finessed indefinitely. Americans may find themselves forced to pay more to right the ship but taxes do not build structural growth. Declining median net real worth in time will cramp rising markets. Even Merkel's party's leader said "we cannot accept that people's pensions be used as collateral." In Cyprus, as in other markets large and small, big money flows in and leaves first and "in the end it's the little investors who lose the most."

The Cyprus issue strikes at the unmerited confidence and growing optimism Fed credit creation has built. A deal is unclear and changes outpace the writing of an article. Could bankers and high government officials, not American depositors bear the brunt here? In Cyprus, the people want their money but so do their banks and ECB. President Putin terms the ECB plan "unfair, unprofessional and dangerous," two keen thrusts followed by a shot across the bow. Russian billionaire Vladimir Potanin stated that the crisis was like the failure of Lehman Brothers. In that the problem exposes the fraudulent financial basis of the world's fiat economies; he's correct. In any case, Russia now says it won't bail Cyprus out, -- most tycoon money already has left. The wisdom of von Mises and Hayek is being demonstrated. The fiat system's slow-motion collapse will accelerate amid rising geopolitical-financial turmoil.

For now, the Dollar and RMB are the cleanest shirts in the laundry basket but precious metals and the platinum and palladium needed to address China's terrible air pollution (often at levels "hazardous to humans" and requiring masks to go outside) are set for secular expansion. With China's cars and trucks increasing from 90 million to 400 million by 2030, even slight attempts to stem its pollution will boost demand for catalytic converters and override the costs of political volatility in major world supplier, South Africa. The other main producer (15%) is Russia who has a major stake in the Cyprus matter and upon which Europe depends for oil and natural gas. Here is a crux of energy - economic growth, finance and geopolitics. These three nations are integral to the new monetary order.

Europe could rely more on American energy but executive branch policies crimp US production and limit exports, raise prices and feed the geopolitical crises that lead to currency and market swings and collapse. The $/BRICS-gold reserve suggested by OMFIF expects that China's ancient hegemonic views, Russian suspicions and fiat-bloc games can engage in mutual productive fashion. We will see. Note that the plan excludes Europe from its core currencies. Current problems make that look prescient. Late Friday evening, a group of UK Treasury seniors flew to Nicosia to help forge a compromise in its former colony.

Googling "Cyprus crisis" gives stories from The Guardian, The Telegraph (several each), the Economist, New York Times and NBC news. The list varies day to day: later Saturday, it included the BBC and Reuters. This nexus of media and geopolitical - financial power should be considered in analysis of all related issues. Cyprus used the pound until 2008 when it switched to the Euro which appears ill-considered like much of the EU plan. Euro growth and demographics are sinking faster than our own and a sinking Euro makes other fiats look less bad.

Amid substantial turmoil, the world's monetary system is being re-shaped and equities will be shaken. Precious metals and mining prices in the past two weeks are rising from a rounded bottom made in the previous four weeks. Trim your equity positions and add metals and miners including the platinum group, for example via the eponymous (NYSEMKT:PLG) or Sprott Physical Platinum (NYSEARCA:SPPP). Mr. Potanin, quoted above, is CEO of Norilsk Nickel (GMKN.MM) the world's largest miner of palladium and nickel.

Precious metal miners that have recovered particularly strongly from the 52-week or secular bottoms they made in February or early March include Silver Standard Resources (NASDAQ:SSRI), Sandstorm Gold (NYSEMKT:SAND) and debt-free juniors like McEwen Mining (NYSE:MUX) and Vista Gold (NYSEMKT:VGZ) which are 45% and 40% respectively off recent lows. Also coming back strong are mid-tier producers IamGold (NYSE:IAG), Kinross Gold (NYSE:KGC) and Yamana (NYSE:AUY), dividend payers I have mentioned several times. Those who entered the bottom have enjoyed gains of 19% and 10% respectively. Friday, a day of light trading in the sector Eldorado Gold (NYSE:EGO) rose 1.14% on double volume. Also track Canadian exploration company Reservoir Minerals (OTCPK:RVRLF) which is developing a large high-grade property in Serbia in collaboration with Freeport-McMoRan (NYSE:FCX) and its Serbian partner. On March 21, streaming company Silver Wheaton (SLW) rose after announcing increased revenues, EPS, income and dividends. Its fundamentals, model and contracts are good and its fall only retraced 26% from its 52-week high. With its reserves, 2.6% dividend and streamlined plans, Barrick Gold (NYSE:ABX) below $32 is deep value. Mixed natural resource, agricultural and bullion play Sprott Natural Resources (OTCPK:SCPZF) has proved solid and pays a monthly dividend that annualizes to 10.4%. In equities, the markets confirm my suggestion that Consumer Goods and Services, Health Care and Energy sectors will lead in uncertain times. One still must run with this market.

We are at a major inflection point for world finance with the frayed hegemony of the fiat currency experiment leading to a new monetary reserve system. Coming weeks will show if this transition is to be managed in a collegial manner or if "the controlling oligarchy" that Huxley described will continue "to use terroristic stress to induce people to consent to their servitude" and declining real wealth.

If you have not already begun to do so, it is the time to add to your precious metals and selected miners positions. Increase your allocation to them to 15-25% depending on your circumstances. Keep some extra cash on hand and take advantage of the CAD .978 to buy some Canadian, a neighboring currency that cannot so readily be inflated. With Japan structurally finished and ongoing Euro crises, the dollar looks strong. But with an economy and markets built on debt and declining demographics, the road will get bumpy. Shunned metals and miners like those mentioned above will rise as world economies re-set.

Disclosure: I am long SLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.