The Silver Squeeze: Bank Runs Versus EU Short Covering?

By: Dr_Jeff_Lewis

According to Google Trends, the number of Internet searches for the phrase “bank run” has reached an all-time high, demonstrating just how concerned many intelligent people are becoming over the stability of the global banking system.

Amid these troubling times for financial institutions, silver is continuing to shine as the “poor man’s gold” that will provide a safe haven investment asset if paper currencies lose even more of their already tenuous credibility.

Greek Bank Run Fears Grow as EU Exit Appears More Likely

Reports surfaced recently that worries about an imminent Greek exit from the Eurozone have sparked the withdrawal of almost a billion Euros in cash over the past few weeks from Greek banks. Over the last couple of years, withdrawals of cash on deposit from Greek banks have averaged between 2 and 3 billion Euros per month. Nevertheless, January’s withdrawals exceeded 5 billion Euros.

Due to this growing loss of confidence in the banking system, Greek officials are increasingly worried about a burgeoning bank run. Reuters even reported that Greek President Papoulias warned political leaders of a "great fear that could develop into a panic" during negotiations to form a governing coalition within the fragile Greek political arena.

Although Greek political leaders are making a concerted effort to discourage the ongoing cash withdrawals, the average man on the street seems to be increasingly losing faith in the solvency of Greek banks.

Paper Currency Looks Increasingly Tenuous as the Euro Trades Near Two Year Lows

While Greeks seem to prefer to have their cash in hand rather than held as deposits in the bank, how long will it be before these same people ask themselves if the paper currency they are holding is actually any good?  When they eventually do, the relatively tiny physical silver market should see a very sharp, if not downright exponential, rise in demand.

Another key factor arguing for a higher silver price in the near term is the huge short position the forex market is currently running in the Euro, largely in anticipation of an imminent Greek exit or “grexit” from the Eurozone and its consolidated paper currency the Euro. 

The Euro recently closed below key psychological support at the 1.2500 level versus the U.S Dollar on May 30th for the first time since June 30th of 2010.  EUR/USD has thus far traded as low as the 1.2358 level, as substantial follow on selling hit the currency pair hard and forced it down to a fresh low well inside oversold territory on the 14-day RSI.

Euro Short Covering After Increasingly Likely Grexit Should Boost Precious Metals

Although the Euro is hitting new recent lows versus the Greenback, the eventuality of a Greek departure seems to be substantially priced into the market for the Euro already. As a result, a large bout of short covering in the Euro after the traumatic event actually occurs could squeeze the precious metals notably higher since it would also push the U.S. Dollar down hard. 

This shock would also temporarily take the spotlight off the other PIIGS countries for the time being, until they also probably meet a similar fate to Greece. Spain’s status within the Eurozone also currently looks quite shaky, and that county could well be the next in line to follow in Greece’s footsteps.

On the other hand, if Greece does not ultimately exit the Eurozone, then the short covering in the Euro should have an even more positive effect on EUR/USD, as well as on the prices of silver and gold.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2012 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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