As we watch the Cyprus bailout trigger capital flight in the Euro, and while foreign investors are starting to pull their international savings out the Euro-zone completely, one starts to wonder where it is that everyone is taking their money to. Interestingly enough, despite the way in which the issues in Cyprus specifically put Russian investors at risk, there is no real evidence of a flight to the Ruble. That being said, the movement between the Euro and other asset classes seems to suggest that there is still some movement taking place towards both traditional and innovative safe havens, coming from both foreign and domestic savers.
When we first think of a capital flight situation from the Euro-zone, an appreciation in gold comes to mind as the traditional outlet for capital flight. Sure enough, looking through the EUR/Gold price chart, we can see a marked spike in the price of gold in terms of Euros as the issues in Cyprus began, suggesting that this was one outlet that investors chose to pursue. That being said, there is also a very strong argument in circulation that the price of gold is over-valued, and will not therefore be able to maintain its record highs into the rest of the year. As such, investors took this crisis as an opportunity to move into some non-traditional asset classes, and into securities that were previously through to be already overbought.
While both local and foreign savers were taking their funds out of their European accounts and placing them into gold deposits, an interesting new phenomenon started to show itself as being a new potential store of capital for concerned investors. Although there isn’t really enough room in this article to go into detail about the BitCoin phenomenon, it is suffice to say that the new online currency has managed to achieve its first real bull run as a result of European instability. This is most apparent by the way in which the BitCoin’s value surged over the course of the Cypriot crisis.
The end result was an increase of as much as 57% over the course of the last few weeks, with purchase volumes demonstrating a surprising level of support for the new point. While the encrypted nature of the BitCoin itself restricts us from coming up with tangible conclusions about where it is that these funds came from, there is a strong argument that European savers have actually started shifting a portion of their holdings into this currency to protect it from the political risks that they are currently facing.
Finally, another interesting trend taking place in the Euro-zone is the emergence of a premium being placed on physical cash, as a result of the capital controls that governments are placing on bank withdraws. As savers line up for hours to simply gain access to their maximum cash amount, they are showing a demand for cash at the expense of their time, which has its own intrinsic value. From there, businesses have begun restricting their willingness to accept credit cards as payment, because of their sheer costs, and the capital restrictions being placed overall. The end result is a situation where European savers (Cypriots in particular) are being choked for liquidity, to the point at which they value cash above the price of their electronic currency.