EDITOR: | June 29th, 2016 | 5 Comments

The Italians Need Some Gold!

| June 29, 2016 | 5 Comments
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“If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard. I’m known as a gold bug and everyone laughs at me, but why do central banks own gold now?” Alan Greenspan. June 28, 2016

Why do I think that the Italians need to own some gold you might ask? Well it has a lot to do with the poor state of Italy’s banks, the poor state of Italy’s economy, and Italy’s government about to make the mistake Ireland made when it guaranteed its banks, and then found Ireland was too weak to support the guarantee, and then needed a bailout from the EU. According to a report on Reuters “Italy is preparing to protect its banks from a destabilising share sell-off following last week’s Brexit vote.”

According to Reuters, Italy is proposing a state guarantee for bank bonds, by means of the Italian Treasury and Italy’s state lender Cassa Depositi e Prestiti. Reuters posited that Prime Minister Renzi raised the subject with Chancellor Merkel in Berlin on Monday. Asked if the subject came up at the news conference afterwards, all Mr. Renzi said in reply was that Europe and the national institutions would cooperate to bring about “calm and confidence.”

According to Italy’s media quoted this week by Reuters: “Daily newspaper Il Fatto Quotidiano said the government’s contingency plan involved taking stakes in ailing banks, to be financed by around 40 billion euros in new public debt, but the second, government source said there was no such plan.”

The paper said Renzi’s administration was already in talks with the European Commission about possible support measures.

Two other papers, Corrieredella Sera and La Repubblica, said Italy would seek to take advantage of possible exemptions to European state aid rules in case of “exceptional events” in order to bolster its banks if stocks continued to fall sharply.

That tells me that Italy’s banks are in deep trouble, and that following the UK’s Brexit vote, that trouble just turned into a massive crisis. So what, you might be tempted to say. Well what Italy is asking for is against the European rules in place since 2013. State aid is only supposed to kick-in as a last resort after the bank bondholders and large depositors have been bailed-in, i.e. suffered a haircut, as in losing some money.

This week the Financial Times commented: “The strict EU rules against state-backed rescues took years to negotiate and are so new they have barely been tested in a crisis with a major bank. But they were an essential precondition to eurozone integration; without these guarantees Germany would not have accepted the risk-sharing involved in creating a banking union.”

Senior European officials fear Mr Renzi’s effort is, as one said, an “opera buffa”, putting off the deep-rooted reforms its lenders badly require, or a needs-must intervention that would shatter Europe’s commitment to the new bail-in regime.

To mount any rescue, Mr Renzi needs a waiver from European Commission state-aid rules, and a legal route through the bail-in rules of the EU’s Bank Resolution and Recovery Directive — something Italy has tried and failed to secure in the past.

Rome has seized on the market turmoil triggered by the Brexit vote to restate its case on the grounds that “financial stability” is now threatened. In Brussels, many regard that claim as overblown. “What Renzi asks for and what he gets may be very different,” said one senior eurozone official.

For Italy, the question is whether a capital injection will ultimately address the deep malaise of 600 banks that operate on a business model that may no longer be viable.

Italy’s 600 banks are riddled with 360 billion euro of bad loans, with some 200 billion euro alone already believed to have gone terminal. But even if the European Commission relents and gives Italy the waiver it’s seeking, how likely is an extra 40 billion bailout to work in a business model gone wrong, no matter if a nearly bankrupt Italy guarantees its banks. Any large depositor with any sense will merely use the opportunity to get down to the minimum state guarantee level, and place their euros abroad.

But that’ not so easy as before. The ECB and Swiss National bank have imposed a negative interest rate regime over much of Europe. Which brings me back to gold. Why place money on deposit and get a negative return for the privilege, when a bullion alternative is around, with in the circumstances, every prospect of the gold price rallying for months and years ahead.

But any large depositors or nervous bondholders might need to be quick. Goldcore informs us that a physical bullion crisis seems to have developed:

Bullion banks “have been panicking” and advising that soon, they may no longer be able to quote prices on large gold bar orders. This response is previously unheard of and indicates the increasing illiquidity in the large gold bar market due to a recent surge in HNW, UHNW and institutional (wealth managers, hedge funds, banks etc) demand across the world coupled with already robust central bank demand.

The increasingly illiquid physical gold market where supply cannot keep up with demand underlines the importance of owning physical bullion coins and bars – either in your possession or having direct legal title to your individual coins and bars. Bullion should be owned in your name or your company’s name and be stored directly in the safest vaults in the safest jurisdictions in the world – outside the financial, banking system.

It’s the early bird that gets the worm, albeit it’s the second mouse that gets the cheese. I suspect that we haven’t heard the last of Brexit, Italian banks, and the new gold rush. Even fallen former guru “Bubbles” Alan Greenspan, who ran the Fed, seems to have found his gold side again.

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.” Alan Greenspan 1966.


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Comments

  • Adrian Nixon

    Fascinating Graeme. I agree with your analysis. People migrate to gold in uncertain times. This uncertainty is amplified by our interconnected world. Things will get more uncertain before the dust settles on all the change we are experiencing.
    Adrian

    June 29, 2016 - 11:34 AM

  • Graeme

    Poor Italy, Merkel and co., seem to have shot down Renzi’s bailout plan, insisting on sticking to the rules and hammering the large depositors and bondholders. That hammering might be as early as this weekend or next week.

    Italian Bank-Rescue Push Falters as Merkel Sticks to the Rules
    http://www.bloomberg.com/news/articles/2016-06-29/germany-said-to-oppose-shielding-investors-in-italian-bank-plan

    June 30, 2016 - 3:33 AM

  • Gold and Silver Bullion – News and Prices

    […] The Italians Need Some Gold! (Investor Intel) […]

    June 30, 2016 - 8:20 AM

  • Graeme

    The EU is now runing around like a headless chicken over the Italian bank job. Bailout coming one minute, off again the next. A giant bail-in is coming for bondholders and large depositors, most likely.

    http://www.bloomberg.com/news/articles/2016-07-06/italy-could-spark-systemic-banking-crisis-socgen-chairman-says

    July 6, 2016 - 10:26 AM

  • Graeme

    That giant bail-in of bondholders and large depositors is back on again after today’s decision by the EU’s top court which backed the German position of a bail-in first, before any state bailout. Italy’s large depositors only have themselves to blame, if they remain in Italy’s banks long enough to get bailed in. As for the bondholders, many before this ruling were already looking at 70 cents on the euro. Many of the bondholders are ordinary Italian families that chased yield believing the state would always protect them. Prime Miister Renzi needs these same voters to vote yes on his coming referendum to reform Italy’s Byzantine constitution. If the voters get bailed-in, Renzi’s constitutional reform likely gets shot down. In the age of negative interest rates across much of Europe (NIRP,) the large depositors needed to buy gold bullion yesterday.

    “Oh, what a tangled web we weave. When first we practice to deceive!” No not Goldman Sachs Milan, “Marmion” by Sir Walter Scott, published 1808. There’s no excuse for not knowing in 2016.

    July 19, 2016 - 7:45 AM

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