Gold News

Gold Price Gains "a Direct Result" of Low Rates & Government Deficits Ahead of Europe's "Secretive" Bank-Test Results

Gold Prices rose to a 5-session high above $1200 an ounce early Friday, showing a week-on-week gain for US, Euro and Japanese investors but holding unchanged against Sterling and Swiss Francs.

Government bonds edged lower as Silver Bullion held flat and crude oil slipped back through Thursday's 11-week high of $79 per barrel.

Yesterday's 2% gain on Wall Street – plus a strong rise in Asian stocks – failed to spur more than a 0.3% rise in European equities, as investors and traders awaited the "stress test" results on 91 regional banks.

"The correlations for Gold Prices are all over the place at the moment," says Phil Smith at Reuters Technical in Beijing, "and it is actually high-positive with the US Dollar – which is not normal.

"Breakdowns in 'normal' correlations generally point to a switch in the attitude to risk, and gold seems to be undergoing a rethink by some investors after its huge rally over the past years."

Undertaken by what the Associated Press calls the "the little-known" Committee of European Banking Supervisors (CEBS) here in London, "the release of bank stress-test results is unlikely to be the silver bullet that guarantees a rapid normalization of the financial system," says UniCredit's chief economist, Marco Annunziata, "given the recalcitrant and rather secretive way in which it has been prepared."

Rumors in the European press saw Greece's Atebank drop 4% of its value this morning, while Madrid's El Pais said Spain's "caja" savings banks were likely to fail.

"The ratio of Tier I capital, reserves and preferred stocks that an institution must hold to survive the stress test's assumed risks comfortably is 6%," says the paper, "although the legal requirement is 4% minimum."

A survey by Goldman Sachs of 376 professional investors and analysts said today that 10 of the 91 European banks tested may "fail", and so need to raise fresh capital from shareholders.

On the economic front today, Germany's Ifo business sentiment index came in sharply ahead of expectations, as did the UK's latest GDP data, showing 1.1% growth between April and July – the fastest pace in four years.

Both the Pound and the Euro jumped in London trade, nearing Monday's 11-week highs against the Dollar and driving the Gold Price down to £775 and €925 per ounce respectively.

"There is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now," writes European Central Bank chief Jean-Claude Trichet in today's Financial Times, concluding the newspaper's week of 'Austerity vs. Stimulus' debate.

"The ECB will contribute to consolidate a confident economic environment by ensuring price stability...Sound public finances are [also] a decisive component of economic stability and sustainable global growth."

Across in Washington on Thursday, however, "In the short term I would believe that we ought to maintain a reasonable degree of fiscal support, stimulus for the economy," said US Federal Reserve chairman Ben Bernanke to the House Financial Services Committee.

The current bull market in Gold Bullion and other precious metals "is the direct result of the evident profligacy of governments the world over," says John Browne, senior market strategist at asset-management group Euro Pacific Capital.

"Spendthrift politicians in Washington, London, and Tokyo, have caused people to lose faith in paper currencies."

"Spiraling deficits, ballooning government debts and risk of eventual monetization" are all supporting Gold Prices, agrees BMO Global Commodities strategist Bart Melek, quoted today at MineWeb.

"The expectation that the Fed, the ECB and other central banks will largely be on hold well into 2011 are additional factors that are likely to keep investors Buying Gold and willing to pay a premium for the insurance properties the metal offers."

"We believe that US interest rates will remain low for much longer," wrote Walter de Wet at commercial and bullion bank Standard Bank yesterday.

Citing the Taylor Rule – which suggests interest rates "by balancing the Fed's two major targets, inflation and unemployment" – the Fed will keep rates at zero until "at least 2012," reckons the Standard Bank team, and "low rates in the medium term are bullish for gold, despite our view that inflation will remain low.

"Confidence in the strength of emerging-market currencies [also] indicates that risk appetite for precious metals may remain firm."

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Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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