Thursday, December 8, 2011

Is Europe's Banking System About to Fail?

There are signs that the banking system in Europe is now under huge stress. Stress that could see it break very soon unless massive intervention is undertaken. As mentioned a few weeks ago, the Bank of England Governor warned that Britain on the brink of second credit crunch. The latest headlines just tell us that a slow train-wreck (as Turk describes it) is occuring before our eyes. Tim Geithner just happens to be in Europe also.

This is why failure is close. The balance sheets of large banks are supposed to have asset values that at least match the amount of money deposited. But with so much money having gone into derivatives and bond purchasing over the last few years, these asset values are dropping to a point where to sell them would mean massive losses. Banks would not be solvent enough to cover their liabilities. Simply put: they would owe more than they own.

This from James Turk over at King World News:

“You know I have been traveling around Europe quite a bit and there is one common trait, regardless which country I am in, people are really frightened about the possibility of a collapse of the euro.  Money continues to move out of the European banking system, which explains why central banks stepped in with some money printing last week.”

The story goes that a large French bank could not obtain funding and was on the verge of collapse.  When a depositor withdraws money from a bank, the bank has to turn to other sources of funding or reduce its assets.  Given the nervousness about insolvency concerns at many banks today, banks have few funding alternatives.  Consequently, last week’s stop gap measure by the central banks is probably going to be short-lived.

Things aren’t any better on the other side of the Atlantic.  I see that the US government debt increased $310 billion in the first 2 months of this fiscal year.  This is approximately a $1.9 trillion increase.  Clearly these kinds of numbers are not sustainable.  Something has to give as we watch this slow motion train wreck, and in my view it will be more problems for the world’s currencies as confidence in governments and central banks continues to erode.

The collapse of the system are very real because governments have not yet come to grips with the fact that their capacity to borrow is limited.  History has shown that over-indebted countries always destroy their currency.  When it comes to the future we can only make informed choices and in my view physical gold and silver are the right place to be to weather this worsening storm...."

Marc Faber states he is ready to look at pruchasing hard assets again as in times of money printing, hard assets are the only insurance against a fast devaluing paper dollar. Gold and silver being the best hard assets to preserve value.

As Jim Sinclair recently said, "Slowly gold creeps back to its historic position as money in the public eye."

Gold in New Zealand dollars: $2232.47 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $41.66 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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