Merk Funds president and CIO Axel Merk is certainly qualified to make sense of the Cypriot mess, and he attempts to do just that in his latest commentary. Specifically, he wonders why gold isn't going through the roof as a hedge against all that ails the island nation, and by extension Europe itself.
"Had those with money tied up in the Cypriot banking system owned gold instead, they might have been able to watch the unfolding crisis relaxing on the beach," Merk (left) writes, before positing, "So why isn't gold going through the roof? Is Cyprus too small to matter? Can it happen in the U.S.? Should investors hold gold?"
First, be aware that bank failures do happen, he notes, in Cyprus and the United States alike.
"A bank deposit is nothing but a loan to the bank. To the extent that these deposits are guaranteed, the creditworthiness of the guarantor should be considered. In Cyprus, the government guaranteed deposits up to 100,000 euros [about $128,500]; in the U.S., the FDIC guarantees deposits up to $250,000."
He adds that in the United Sates, unlike in Cyprus, there is a well-defined process to seize and unwind insolvent banks. Crises will happen, but they are less stressful when sound institutional processes are in place. The other key difference is that U.S. banks have generally rebuilt their balance sheets, whereas some European banks have dragged their feet, hiding behind national regulators.
"To deal with excessive debt loads, the Eurozone imposes a mix of austerity and restructuring; restructuring is a fancy word for defaulting on one's obligations. When deposits are lost, depositors get to experience financial repression rather directly."
In the Unites States, in contrast, financial repression is exerted less explicitly by imposing negative real interest rates on savers.
Addressing Mohamed El-Erian's argument that savers don't revolt, thus making them an easy target, he noted that El-Erian, at a recent speech at Stanford University, also appeared to suggest the United Sates will heal if the Federal Reserve only "buys enough time."
"We don't believe buying time will prompt our policymakers to get their act together," Merk counters. He then turns back to the question of gold, and why prices are not rising, by addressing conventional wisdom:
