Gold News

"Strong Demand" for Physical Gold Bullion, Banks "Insolvent Not Illiquid" and "Must Recapitalize in New World Order"

Gold Bullion prices dipped to $1644 per ounce Wednesday morning in London – 2.2% down on last week's close – before bouncing, while stock markets gained following reports that agreement may be close on enlarging the Eurozone bailout fund.

Silver Bullion fell as slow as $31.37 per ounce – 2.6% down for the week so far – while US Treasury bonds dipped and commodities were broadly flat.

"Physical demand for gold remains strong," says Marc Ground, commodities strategist at Standard Bank.

"As we've seen in the past few weeks, we foresee significant interest emerging below $1,650. Therefore, we remain confident that a sustained fall below this level is unlikely, although a temporary dip towards $1,600 could be on the cards if the speculative market continues to shun gold."

"At the moment it's just a traders' market rather than an investors' market," reckons one Gold Bullion trader in Singapore.

"It goes 20 bucks one way and 20 bucks the other way, then we are unchanged. It lacks a main driver."

European stock markets saw healthy gains this morning – with banking stocks among the main winners, a phenomenon also observed in Japan and the US over the past 24 hours.

US stock markets rallied in late trading the previous day – with the Dow jumping over 250 points in fifteen minutes – following a report in British newspaper the Guardian that France and Germany had agreed to increase the European Financial Stability Facility to €2 trillion.

Eurozone officials however played down the rumors. German finance minister Wolfgang Schaeuble has briefed coalition colleagues that the EFSF should be increased to a maximum of €1 trillion, according to FT Deutschland, which did not cite its source.

Recent weeks have seen various options discussed for increasing the scale of the EFSF – including leveraging it with European Central Bank funds and using the EFSF's €440 billion to guarantee a portion of privately-held sovereign debt, much as an insurer would.

Eurozone national parliaments have now ratified a July agreement to expand the scope of the EFSF – granting it powers to buy government debt and recapitalize banks.

"Gold has nowhere to go unless there is clarity on what Europe wants to do," says Ronald Leung, Hong Kong-based Gold Bullion dealer at Lee Cheong Gold Dealers.

Elsewhere in Europe, British, French, German, Irish and Spanish banks have announced plans to reduce their size by a collective €775 billion over the next two years – through asset sales and reduced lending – in order to comply with expected higher capital ratio requirements, news agency Bloomberg reports.

Morgan Stanley estimates that banks Europe-wide – several of which have expressed reluctance to recapitalization as they fear dilution of existing shareholders – will eventually need to shrink by €2 trillion.

Asset sales, however, "just won't work" Simon Maughan, head of sales and distribution at MF Global UK in London. 

"Asset sales are impractical in the current environment...every bank is selling, and no bank is buying...Beyond that, the magnitude of the cuts the banks are talking about is nowhere near the likely required amount of deleveraging. They need to reduce hundreds of billions more to adjust to the new world order. There has to be a recapitalization."

Ratings agency Moody's lowered Spain's sovereign credit rating on Tuesday by two notches from Aa2 to A1, while maintaining its negative outlook. Fellow ratings agencies Fitch and S&P have both downgraded Spain this month.

Here in London, the nine members of the Bank of England's Monetary Policy Committee voted unanimously in favor of an additional £75 billion of quantitative easing at this month's MPC meeting, minutes published this morning show. The MPC was also unanimous in its decision to keep its interest rate on hold at 0.5% - where it has been since March 2009.

"The provision of additional liquidity support to countries or institutions in trouble can buy valuable time," Bank of England governor Mervyn King said on Tuesday.

"But that time will prove valuable only if it is used to tackle the underlying problem... Four years into the crisis it is surely time to accept that the underlying problem is one of solvency not liquidity – solvency of banks and solvency of countries."

Over in Washington, US regulator the Commodity Futures Trading Commission voted 3-2 yesterday in favor of imposing "position limits" on traders – including traders of silver and Gold Futures on New York's Comex exchange – in order to curb "excessive speculation".

Despite voting in favor of the measure – which has been designed to accord with last year's Dodd-Frank legislation on financial services – CFTC commissioner Michael Dunn called position limits "a sideshow".

"No one has proven that the looming specter of excessive speculation in the futures markets we regulate even exists," he said.

Gary Gensler, chairman of the CFTC, said the rule was necessary to "protect the markets both in times of clear skies and when there is a storm on the horizon".

"This agency is setting itself up for an enormous failure," countered Jill Sommers, who voted against the rule, adding that the CFTC risks being blamed for high commodity prices if the limits do not have the effect of curbing price rises.

The new rule "is likely to affect the amplitude of the swings in prices, and drive business away from Comex to other forums such as OTC [over-the-counter], MCX [the Multi Commodity Exchange in Mumbai], or Hong Kong," reckons David Thurtell, metals strategist at Citigroup in London.

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Editor of Gold News and presenter of BullionVault 's weekly gold market summary on YouTube from 2011 to 2013, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

See full archive of Ben Traynor articles.

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