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Sharp Drop for Gold, Europe's Banks are "Dead Men Walking"

Commodities / Gold and Silver 2011 Sep 14, 2011 - 08:23 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleU.S. DOLLAR gold bullion prices fell 1% in an hour Wednesday lunchtime in London, dropping to $1818 an ounce – a 2% loss for the week so far – before bouncing, while stocks gained despite news of a ratings downgrade for two French banks.

Government bonds fell and commodities were steady, while gold bullion prices in Euros dropped to €1325 per ounce as the Euro continued its rise after news that Brussels will consider introducing Eurobonds.

"There is a combination of factors that is sending gold down, predominantly the equity markets being crushed over the last few sessions and investors having to liquidate profitable metals positions to meet their margin calls in equities," says a note from Swiss refiner MKS.

Silver bullion prices fell to $40.71 per ounce – 1.7% down on the week so far.

Ratings agency Moody's downgraded the debt of French banks Credit Agricole and Societe Generale on Wednesday – while a third, BNP Paribas, had its downgrade review extended.

A day earlier BNP had to deny rumors that it could no longer obtain funding in Dollars from credit markets.

Moody's cited the banks' exposure to Greek sovereign debt, as well as their "continued reliance on wholesale funding" – meaning each bank must fund a significant portion of its operations via borrowing from credit markets.

Moody's said it does not expect to downgrade the long-term debt of BNP by more than one notch as there is a "likelihood it will receive systemic support from governmental authorities if needed."

France's GDP, however, is around €2 trillion by International Monetary Fund estimates – while the balance sheets of French banks "are some 400% of that number," says David Zervos, head of global fixed income strategy at securities and investment banking group Jeffries, which manages around $3 billion of assets.

"The banks are dead men walking with massive leverage...Europe as a whole is about to embark on a sloppy financial market socialization process."

Banks across Europe are losing deposits, news agency Bloomberg reported on Wednesday. In France, deposits by financial institutions – which make up 50% of total deposits – have fallen 6% since June last year, according to European Central Bank data. 

Financial institution deposits in Germany meantime make up one third of all deposits. They are down 12% since June 2010 – and 24% since September 2008, the month that saw Lehman Brothers collapse.

In Brussels meantime, the European Commission "will soon present options for the introduction of Eurobonds" – joint-government bonds collectively backed by all Eurozone nations – Commission president Jose Manuel Barroso told the European Parliament Wednesday.

French president Nicolas Sarkozy last month described Eurobonds as something that "can be the end of the European integration process, not at the beginning." 

German chancellor Angela Merkel meanwhile called them a "last resort", with her spokesman adding they are "simply not a sensible idea".

Indebted countries "must put their houses in order," Chinese premier Wen Jibao said Wednesday.

"The major developed economies should develop responsible and effective monetary policies, properly handle debt issues, ensure the stable operation of investment in the market and maintain confidence of investors around the world."

Wen vowed that monetary policy in China – the second-largest source of private gold bullion demand worldwide – would remain "prudent".

Official data show Chinese consumer price inflation was 6.2% in August – while benchmark deposit interest rates are at 3.5%.

Here in London meantime, new data showed the volume of silver and gold bullion cleared in August rose sharply compared to July, according to figures published Wednesday by the London Bullion Market Association.

An average of 805 tonnes of gold bullion a day – a 31.9% jump from July – was transferred between LBMA clearing members last month. 

Over 5300 tonnes of silver bullion were transferred each day – a rise of 7.3% from the month before.

The total volume of silver and gold bullion traded each day will, however, be several times larger, since the clearing statistics only show net transfers of gold between London's largest, market-making bullion banks.

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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