Platinum Advances On Cyprus, Stocks Data: Sunshineprofits

How will the rejection of the Cyprus bailout impact the stock market? Will it make platinum any less appealing – especially relative to gold?

The genie has been let out of the bottle. The fact that a democratic government could propose such a plan is a game changer. Ordinary people now know that putting their savings into insured bank accounts is no longer the guarantee of a good night’s sleep. When governments are in desperate financial straits, they will not hesitate to plunder the accounts of ordinary savers and investors. And that make gold all the more attractive.

The plan was for a one-time tax of 6.75% on bank deposits of less than 100,000 euros, even though deposits are insured up to that amount in Cyprus and most other European countries. In addition, the government wanted to levy a 9.9% tax on Cyprus bank accounts of over 100,000 euros, many of which hold Russian money. Russian banks and businesses have been flooding Cyprus for years, taking advantage of low taxes and loose regulations, setting the laundering dial on the fast spin cycle. This decision would have penalized small depositors who are not responsible for the bubble and would have let the bankers, shareholders and bondholders off the hook. Worried investors everywhere finally got the point that gold is one of the few safe havens, and it went up $22.8 (1.43%) this week. On Tuesday, for the first time since February 6, gold was added to the trust for the SPDR Gold Shares ETF (GLD).

Cyprus, like Iceland before it, has an outsized banking sector eight times the size of its economy, which indicates that money flows into its banks without any connection to the local economy. Just for comparison, U.K. banks are only three times larger than the British economy, and London is considered to be a global financial center. Cyprus banks were heavily damaged by exposure to Greece and now Cyprus' entire banking system needs to be capitalized.

Even by just having considered shaving the top of bank deposits, a psychological Rubicon has been crossed, raising some serious questions and issues.

First, is why bother having a deposit guarantee if governments can expropriate your deposits? Even though policy makers claimed this would be a one-time event, how sure is it? If this were to happen in Cyprus, could it not happen anywhere else in the eurozone? A similar proposal is already being considered in New Zealand. Without credible deposit insurance it’s every person for himself. All bets are off, and it’s a matter of how fast you can queue up to withdraw your money. With such low interest rates paid on deposits, wouldn’t it be smarter to hold gold? Without public trust, the banking system the economy cannot function.

Cyprus is a small country of less than a million people. It joined the eurozone on January 1, 2008. That decision, to forgo sovereignty of its own currency, sealed its fate. Even though Cyprus backed down from the plan to tax deposits, just bringing it up as a possibility, might have killed its status as an offshore tax haven. But that’s what got it into trouble in the first place.

No one knows what will happen next, but none of the options are pretty. Cyprus debt-to-GDP ratio pushed to 127% in the third quarter of 2012. Only Greece (at 153%) has a higher level. It is politically difficult to persuade German taxpayers to finance a bailout of an off-shore money heaven for shady deposits.

So either Russia will come to the rescue with a fat check, or EU officials will relent when faced with the prospect of a Cypriot exit from the euro zone. Another possibility might be that Cypriots tax the big accounts and spare the small, mostly local savers. Cyprus has no central bank to prop up its banks like a non-eurozone country does. So the last option is for Cyprus to exit the euro zone and to start printing its own currency.

The Cyprus crisis is undoubtedly putting a spotlight on the general disillusionment with the European unification project.

Let’s move on to today’s technical portion to see whether the Cypriot events have had any influence on the general stock market and platinum (keeping in mind that platinum tends to outperform gold when stocks are rallying) - we’ll start with the S&P 500 Index long-term chart (charts courtesy by http://stockcharts.com.)


The situation is much the same as last week, as there reaction to the situation in Cyprus has been insignificant. It seems that investors do not view the situation as being important but we think that it is, and that the true impact upon the general stock market is ahead. Technically, the situation in this chart improved this week. RSI levels no longer suggest an extremely overbought condition, so higher stock prices could very well be ahead. Once again, Cyprus could be the game changer depending on what happens and how quickly the current situation is resolved.

Let’s turn now to the financial sector – we’ll use Broker/Dealer Index as a proxy here.

The financials have managed to hold above the 2012 high despite Cyprus events. This is a positive sign, but with RSI levels close to 70, further consolidation could follow anyway. If we are correct about the Cyprus impact, then financials will likely move lower in the coming weeks.

Finally, let’s move on to the platinum to gold ratio.

On the above platinum to gold ratio chart, we see that the ratio moved below 1.0 this week but reversed almost immediately. It is now quite close to this very important support-resistance line. We now view this recent move as a rather insignificant phenomenon, but we will continue to monitor the situation here closely. Iif stock prices decline, the platinum market could be vulnerable. The outlook for this ratio still appears to be positive for now, but the comments we made in a Market Alert sent to our subscribers on Wednesday should be kept in mind:

The situation does look concerning for the platinum market as the platinum: gold ratio moves closely in tune with the general stock market - and the positive outlook on the stock market was one of the factors that made us suggest moving from gold to platinum in previous months. But Cyprus could be a game changer. It's too early to tell if this could impact your platinum-gold selection, because there's not enough data and the plain fact is that platinum is again priced lower than gold, which is a 20+ year anomaly.

To recap from a technical perspective: the situation in the general stock market improved this week. Stocks consolidated a bit, and held relatively well as did the financials. From a pure technical perspective, we should be bullish here but would rather call the situation unclear, as the market has not yet realized the true situation in the Mediterranean. This outlook translates directly into platinum market, as the platinum: gold ratio tends to move in tune with the general stock market.