The Effect of the Cyprus Bailout On Gold and Silver

On Friday March 15, 2013, the small Mediterranean country of Cyprus was granted a bailout. While the size of the bailout initially was not so significant, 10 billion Euros, it is the sharing of the bailout to bank customers that is the real problem. First we need to give a little background on Cyprus and how this country became so important. Cyprus has lenient banking laws and has attracted depositors from all over Europe because of these laws. These customers are looking to hide assets from their home countries and the largest customers of these banks are Russian Oligarchs. They have billions of Euros in the banks of Cyprus that until now had been a safe haven from higher taxes in Russia.

It had been known for months if not years that Cyprus would need a bailout but there was always the assumption that they would get the bailout with no strings attached. After several proposals for the bailout were defeated the final result was that any customer with less than 100,000 Euros would be left alone, there would be no tax. Customers with more than 100,000 Euros would lose at least 40% of their deposits and up to 100% over the 100,000 Euro threshold. This solution was supposed to force the Russian Oligarchs who were hiding money in Cyprus to share the bulk of the losses but unfortunately Cyprus did not shut down bank branches outside of the country and they removed most of their money during the banking holidays in Cyprus.

Another significant part of the bailout was capital controls. Citizens of Cyprus were given limited access to their funds and are only allowed to withdraw a small amount from their bank accounts, 300 to 500 Euros per week. This has led to people having difficulty paying bills such as rent, mortgages, and utilities. This bailout has been called a blueprint for other bank bailouts in Europe and even in the United States. Since March 25, 2013 there has been billions of Euros of outflows from other risky European countries like Spain and Italy. Subsequently there has been a large increase in the demand for gold and silver. Gold and silver have historically been used as currencies and will continue into the future. If you have money in a financial institution and it is above the guaranteed amount you are taking a huge risk and should purchase some gold or silver to protect yourself from banking losses.

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