Not Your Grandfather's Bank Holiday

According to former investment banker Jim Rickards, the solution to the banking crisis in Cyprus should be taken as a warning shot to all savers and investors around the world. His advice is to learn all you can about how global currency markets affect you and savers and investors need to take what happened in Cyprus very seriously.

By Steve Cordasco
04/02/13
The Street

NEW YORK (TheStreet) -- Eighty years ago last month, in March of 1933, Franklin Roosevelt presided over a seven-day bank holiday in the United States, designed to head off a run on U.S. banks.

Some 100 democrats, just elected to office, were determined to show resolve in attacking the nation's fiscal woes. When the banks opened again on March 13, Americans lined up at their banks to redeposit cash taken out just days earlier. A collective sigh of relief could be heard at the Federal Reserve, the Treasury and at the White House.

It almost seems quaint today. A strong, central power acts swiftly and solves a problem. Today, more sinister forces seem to be at work, and there are implications for savers and investors. To get more insight into these implications, I spoke with Jim Rickards, lawyer, former investment banker, and the author of "Currency Wars: The Making of the Next Global Crisis," which was published in 2011.

To Rickards' way of thinking, the solution to the banking crisis in Cyprus should be taken as a warning shot to all savers and investors around the world. "There is a lesson here," he said recently on my radio show, "and the lesson is arrogance. Arrogance in the financial community, in the IMF and among the financial leaders of the world. The message here is: 'Take depositors' money, because the big financial institutions have to live another day.'"

My advice is to learn all you can about how global currency markets affect you. Go out and grab a copy of Rickards' bestseller" Currency Wars," now in paperback with new information.

Rickards says savers and investors need to take what happened in Cyprus very seriously. He has two pieces of advice.

First, if you have large deposits, spread them out among several banks. If the unimaginable happens here, spreading your money out might offer some protection by keeping you, on average, below any minimums that might be imposed.

Second, he says, is to buy hard assets including gold, a sentiment with which I agree. Of course, he's not suggesting a fire sale of your assets to buy gold. Rather, the amount of gold appropriate for any one individual is a subjective figure. But that notwithstanding, a new gold rush could, or perhaps should, be on following the events in Cyprus.

This comes amid an internal inquiry at the Commodity Futures Trading Commission about whether the daily setting of gold and silver prices in London is subject to manipulation, thus raising the question of whether anything is safe.

The short answer from Rickards is, "There is almost certainly manipulation in the gold market." He notes the CFTC, if it launches an investigation, is likely to find little at fault with the price-setting process in London. "It's very much like the old specialist system on the NYSE, and it's very old-school, with a lot of discretion being applied based on the buy and sell orders in the books of dealers. I think it is extremely unlikely that there is manipulation going on in that ring."

Manipulation, he says, can and does occur in futures markets and Comex gold futures markets, where arbitragers can "paint the tape" -- issuing sell orders at the end of the day that are below the prevailing market price, which has the effect of taking the entire market down.

When that happens, Rickards says, there is a an arbitrage between the futures market and the physical market. "So if I see futures going down a couple of bucks and I'm an arbitrager -- I'm not a manipulator, I'm just a hedge fund trying to make a living -- I might buy the futures and sell the physical [gold assets] because I think the futures are cheap and the physical is at a premium and I have an almost risk-free trade."

Who would do this kind of thing? Some point to the Fed or the Treasury, but Rickards thinks China is a far more likely candidate. "We know that China is out to buy thousands of tons of gold, and we know that the market is thinly traded," he said. "It has been going on for years and will continue to go on for years until China acquires the gold they need."

None of this affects individual investors per se who typically do not, or perhaps should not, trade in the gold futures markets.

"The little guy has to be careful," says Rickards. "If you are going to buy gold I would say just buy your gold and put it away as I think it's going to do extremely well. There is very little doubt that with inflation coming and the money printing that is going on around the world, that gold is going higher. I just tell people buy their gold, put it in a safe place and don't read the papers or worry about daily volatility."

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