The European Central Bank's LTRO Isn't Working Out: Protect Yourself With Gold And Silver

Includes: GLD, PHYS, PSLV, SLV
by: Katchum

On Zerohedge, the article of the ECB deposit facility sparked my attention. Apparently, banks are depositing their money into the ECB at an alarming rate (Chart 1). Since the crisis of 2008, this deposit facility had risen a lot (250 billion euro), but has only recently skyrocketed to more than 800 billion euro.

This deposit facility at the ECB is a macro-economic indicator of market tension residing at the European banks. It is seen as a "safe haven" during economic turmoil in Europe. The higher this ECB deposit facility rises, the more banks favor the safety of the ECB deposit over higher returns in the interbank market. It shows that banks aren't lending to each other, and also shows that appetite for European government bonds is declining.

Even though banks borrowed 489 billion euro (LTRO I) and 529.5 billion euro (LTRO II) in loans (at 1% lending rate) from the ECB, a lot of that money just went back into the ECB deposit facility at 0.25%. This means that banks are actually opting to lose money due to fear of a eurozone break-up and government defaults.

Chart 1: ECB Deposit Facility

On Chart 2, we can see that the ECB balance sheet went from 2.3 trillion euro to 3 trillion euro from December 2011 till April 2012 (an increase of 700 billion euro). These increases were mostly due to LTRO I and LTRO II, to provide lending from the ECB to the banks. On Chart 1 though, we see that during that period the deposit facility increased by 600 billion euro, indicating that almost none of that money from the ECB went into the interbanking market.

Chart 2: ECB Balance Sheet All Assets

To show that the interbank lending in the eurozone has come to a standstill, I'll show the 3-month euribor chart, which is the benchmark for interbank euro lending rates (Chart 3). The chart is showing that 3-month euribor is at a 2 year low of 0.715 and it is absolute evidence that the ECB's LTRO isn't working out.

Chart 3: Euribor (3-month)

The overall conclusion of this is that banks aren't buying government bonds and aren't lending to each other. Monetary velocity on the interbank market is slowing down. The lending measures (LTRO I, LTRO II) of the ECB aren't working out very much. This trend can be experienced by the rising government bond yields across Europe as investors anticipate huge losses in government bonds. The advice I can give is, prepare yourself for the worst in Europe, especially if you are a European citizen. In a worst case scenario, we will experience bank failures and possibly even government bankruptcy. The only protection you can have against this is to have precious metals in your portfolio like gold (NYSEARCA:GLD), (NYSEARCA:PHYS) and silver (NYSEARCA:SLV), (NYSEARCA:PSLV)..

Disclosure: I am long (PHYS), (PSLV), (NYSEARCA:AGQ), (GLD), (SLV).