Tuesday, March 26, 2013

Could Cyprus crisis catalyze a return to gold?

The psychological impact of the capital controls in Cyprus – and its potential spread as a “contagion” – won’t be clear until later this week.  But the damage to Europe’s leading financial centers is already conspicuous as the charts demonstrate.

Witness the declines in the stock markets of several major European nations as well the continued weakness in the euro currency.  European bourses were considerably weaker on Monday and Tuesday, led by a fresh new quarterly low in the euro ETF (FXE).  Spain’s stock market was down 2.27% on Monday and down an additional 1.84% on Tuesday. 

Spain’s IBEX 35 stock market index is testing its quarterly low while the Italy ETF (EWI) dropped 4.06% on Monday and a further 1% on Tuesday.  The country that got the euro zone avalanche started back in 2010 – Greece – saw its stock market decline to yet another new low today via the Greek ETF (GREK) shown below. 

As Sharps Pixley pointed out, “Although the Finance Ministers highlighted that Cyprus is a special situation, the European banking crises and contagious effects are very real.”  Italy meanwhile still doesn’t have a government. 

Each of the stock markets and country ETFs mentioned above present a picture of a weakened continent vulnerable to even the slightest bad news.  If Cyprus bank depositors run the banks on Thursday (when the banks in that country are scheduled to re-open) it could send shockwaves through the financial market of Europe.  This in turn would be the catalyst for a return to gold among investors, especially in troubled European nations.

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