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London Gold Market Report 12/06/11 – BullionVault

From Ben Traynor – BullionVault.com

Gold Falls following Credit Downgrades Warning, “Pillars of Banking Sector Disintegrating” as “Not Enough Quality Assets” to Meet Capital Requirements

WHOLESALE MARKET gold bullion prices dropped to $1707 an ounce Tuesday lunchtime in London – 2.2% down from where they ended last week – while stock markets lost their recent momentum after a ratings agency announcement warned that 15 Eurozone governments could have their credit ratings cut.

Earlier in the day gold prices fell as low as $1710 per ounce – a 2% drop from Friday’s close. “Physical [gold bullion] demand is much weaker than it was six weeks ago,” says Standard Bank commodities strategist Walter de Wet.

“Much of the demand weakness is from India where the Rupee has depreciated…[pushing] gold denominated in Rupees to all-time highs.”

Silver bullion fell to $31.83 – 2.4% down for the week so far – while on the bond markets US Treasuries and German bunds fell while UK gilt prices edged higher.

Ratings agency Standard & Poor’s announced Monday that it has placed 15 Eurozone nations on CreditWatch negative – often a precursor to a downgrade – days before Friday’s key European Union summit.

Austria, Belgium, Finland, Germany, Luxembourg and the Netherlands all face a possible one-notch downgrade. Nine other countries, including France, could see their ratings cut by two notches. Of the two remaining Eurozone nations, Cyprus was already on downgrade watch and Greece is rated junk.

S&P has also placed the European Financial Stability Facility – the Eurozone’s rescue fund, currently ratedAAA – on negative watch. The EFSF relies for its lending capacity on Eurozone government guarantees.

“Eurozone governments [have shown they] are not prepared to act collectively in a way that convinces markets,” says Paul Donovan, deputy head of global economics at UBS in London, adding that S&P’s move “may perhaps heighten the desirability of coming out with a compelling solution.”

Following the announcement, the Basel Committee on Banking Supervision – which is currently drawing up a new regulatory framework known as Basel III – may broaden the range of assets banks can use to meet liquidity standards, news agency Bloomberg reports.

Under the proposed new rules, banks will, from 2015, be required to hold enough “high quality liquid assets” – traditionally taken to mean government bonds and cash – to survive 30 days of stress, a requirement known as the liquidity coverage ratio.

“There aren’t enough assets in the world that are genuinely liquid and of high enough quality to allow all the banks to meet this ratio,” says Barbara Ridpath, chief executive at the International Centre for Financial Regulation.

“That’s only likely to get worse because of the changing credit quality of some of the sovereigns.”

“One of the central pillars of the Basel III framework,” adds Matthew Czepliewicz, banking analyst at London brokers Collins Stewart Hawkpoint, “is the notion of a risk-free asset class…that central pillar is disintegrating.”

Here in London, the Bank of England announced Tuesday that it has introduced a new contingency liquidity facility – the Extended Collateral Term Repo Facility – to improve banks’ access to short-term funding.

“There is currently no shortage of short-term Sterling liquidity in the market,” said a BoE statement.

“But should that position change, the new Facility gives the Bank additional flexibility to offer Sterling liquidity in an auction format against the widest range of collateral.”

French and German leaders said Monday they have agreed on new fiscal rules for Eurozone governments. French president Nicolas Sarkozy agreed with German chancellor Angela Merkel’s demand for a revision of the entire EU governing treaty, the Financial Times reports.

In return, Merkel agreed that private sector government bond investors would not be asked to take losses in any future bailouts. French banks have significant exposure to other Eurozone nations – with French banks holding more Italian debt than German, British, Dutch, Spanish and Belgian banks combined – according to Bank for International Settlements data published by newswire Reuters.

“This package shows that we are absolutely determined to keep the Euro as a stable currency and as an important contributor to European stability,” said Merkel.

“What we want,” Sarkozy added, “is to tell the world that in Europe the rule is that we pay back our debts, reduce our deficits, restore growth.”

“Financial markets might be impressed with this rhetoric for now,” says this morning’s note from Standard Bank research analysts Steve Barrow and Jeremy Stevens, “but, in our view, they won’t be impressed for long.”

“I have no particular insight into the problems plaguing the Eurozone,” writes Jeremy Grantham, co-founder and chief investment strategist of Boston-based asset managers GMO in his latest quarterly letter.

“But I can recognize a terrifying situation when I see one. The appropriate response is surely to be more cautious than usual.”

Eurozone investors meantime could improve the diversification of their assets by adding gold bullion to their portfolio, according to findings from a new study published today by the World Gold Council.

In London, foreign exchange traders expect the final weeks of the year to be unusually volatile – with many citing a sharp drop in volumes and reduced demand from major clients, the FT reports.

“The sheer amount of newsflow has made it difficult for people to take positions confidently,” says Adam Margolis, head of FX sales to banks for Europe at Citi. “There’s a real case of headline fatigue.”

Ben Traynor
BullionVault

Editor of Gold News, the analysis and investment research site from world-leading gold ownership
service BullionVault, 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.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk. Information or
data included here may have already been overtaken by events – and must be verified elsewhere –
should you choose to act on it.

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