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Gold Falls as Eurozone Banks Worry about Counterparty Risks

Commodities / Gold and Silver 2011 Sep 06, 2011 - 08:34 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleU.S. DOLLAR prices to buy gold fell to a low of $1877 an ounce on Tuesday morning in London – a 2.3% drop from their new record high set hours earlier – while stocks and the Euro rallied after the Swiss National Bank announced plans to peg its currency to the Euro.

Yields on 10-Year US Treasury bonds hit an all-time low of 1.97% – while yields on Italian and Greek debt moved the other way.

Prices to buy silver meantime dropped to $41.87 – a 3.2% drop from Friday's close.

"Markets are concerned that steps taken by Eurozone leaders to address the problems engulfing some of Europe's smaller economies are insufficient," says one gold bullion dealer here in London.

"Europe has the capacity to drive gold higher," adds Darren Heathcote, head of trading at Investec.

The Swiss National Bank announced Tuesday that will peg the Swiss Franc to the Euro – citing once again the "massive overvaluation" of the Franc – as it aims for a "substantial and sustained weakening" of its currency.

The Franc will be pegged to the Euro at a rate of one Euro to SFr1.20 or more.

"The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities," read a statement from the central bank.

"If the economic outlook and deflationary risks so require, the SNB will take further measures."

Swiss consumer price inflation fell to 0.2% per year last month – down from 0.5% in July – according to official figures published this morning.

The Swiss Franc price to buy gold jumped 7.1% to a record high of SFr 1620 per ounce immediately following Tuesday morning's announcement. The gold price in Swiss Francs is now showing a 22% gain for the year so far.

Elsewhere in Europe, growth in the Eurozone slowed to 1.6% in the second quarter – down from 2.5% in Q1 – according to data released this morning. 

Politicians in Rome will today begin debating Italy's austerity package – while the country's largest union has begun a nationwide strike in protest at proposed measures.

Last week Italian prime minister Silvio Berlusconi abandoned plans for a so-called 'solidarity tax' on high earners.

"The Italian government appears to be in some disarray," says Goldman Sachs Asset Management chairman Jim O'Neill.

"[Already] it has backtracked on some of the more unpopular measures." 

A sell-off of Italian government bonds saw benchmark 10-year yields breach 5.6% this morning –their highest level since the European Central Bank began buying Spanish and Italian bonds on 8 August.

Greek sovereign bonds meantime saw yields rise to all-time highs. The 10-Year rate hit a record high of 19.4%, with the yield on 2-Year bonds breaching 50%.

"The consensus seems to be that the second bailout package for Greece might be obsolete before it has been put into law," explains Michael Leister, London-based fixed-income strategist at German bank WestLB.

"The ECB is having a hard time stabilizing these markets. The pressure is rising."

A note published Tuesday by UBS argues that "the Euro should not exist."

"With its current structure and current membership...[the] Euro creates more economic costs than benefits for at least some of its members – a fact that has become painfully obvious."

Eurozone banks deposited €166.85 billion overnight with the ECB – the highest overnight level in more than two years – the central bank announced Tuesday morning.

"Banks that would normally lend to each other would rather deposit money at the ECB because they are worried about counterparty risk," says Don Smith, economist at interdealer brokers Icap.

"When you buy gold," renowned investor and publisher of the Gloom Boom & Doom Report Marc Faber said Monday, "it's an insurance against systematic failure and problems in the financial markets. I'd buy every month a little bit of gold."

By Ben Traynor

Gold price chart, no delay   |   Buy gold online at live prices

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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