Gold Plummets, "Disappointing" Euro Leaders "Won't Fool Markets for Long"

By: Ben_Traynor

U.S. DOLLAR gold prices fell to $1610 an ounce in Thursday's Asian trade – a 4.2% loss on the week so far – while stocks and commodities also sold off as reports emerged of a split between France and Germany over how to tackle the debt crisis.

Silver prices fell to $30.55 per ounce – 5.2% down for the week.

"Given the current volatility across the financial markets, ongoing uncertainty over the Eurozone's ability to contain its debt problems and continued mixed economic indicators we expect the sector as a whole to remain in a mixed, volatile mood," says a note from Swiss precious metals group MKS.

France and Germany, the Eurozone's two largest members, are in disagreement over how best to use the European Financial Stability Facility – the Eurozone's €440 billion ad hoc bailout fund set up last year – according to press reports.

"The best solution is that the fund has a banking license with the central bank," French finance minister Francois Baroin said last night – a move that would open up the possibility of the European Central Bank funding the EFSF.

"Everyone knows the reticence of the central bank [ECB] and everyone also knows of the reticence of the German position...[but] for us it is and will remain the most effective position."

"[ECB] independence doesn't mean detachment from political decision-making," added European Council president Herman van Rompuy last night.

"Monetary policy cannot be conducted in a social and political void. The central bank's independence is a right, but also entails duties."

Following Baroin's comments, French president Nicolas Sarkozy – whose wife was preparing to give birth their first child – flew to Frankfurt for an impromptu meeting with German chancellor Angela Merkel and Christine Lagarde, managing director of the International Monetary Fund.

None of the three gave any public comment after the meeting, which took place at the city's Old Opera House, the venue for ECB president Jean-Claude Trichet's farewell event.

Germany is reportedly opposed to turning the EFSF into a bank, but is said to back a plan – put forward by German insurer Allianz alongside Deutsche Bank – for the fund to insure a portion of any losses on newly issued debt from troubled sovereigns.

"I have no confidence in this [bond insurance] plan whatsoever," says Hans Redeker, global head of foreign exchange strategy at Morgan Stanley.

"It creates a two-tier capital market, which is dangerous. How can you insure Italian debt but not Belgian, or French debt?"

"It is unlikely financial markets will be fooled by this for long," adds a note from Commerzbank.

French Bank BNP Paribas today made an alternative proposal – that the EFSF should write credit default swaps (which pay out in the case of default) for those who take part in Italian and Spanish bond auctions. BNP says this is less complex way than the Allianz/Deutsche Bank plan of seeking to provide liquidity around auctions.

At a G20 meeting last weekend, EU leaders were given a deadline of this Sunday's EU summit to come up with a plan.

"Quite frankly, Europe's response over the past year has been disappointing," Canada's finance minister Jim Flaherty said earlier this week.

"Uncertainty dominates," reckons Marc Ground, commodities strategist at Standard Bank.
"Instead of sending investors to the usual safe-haven of gold, [this uncertainty] is rather keeping participants on the sidelines."

"It is worth bearing in mind [however]," adds a note from Mitsui Precious Metals, "that even a drop to around $1,500 would not snap the three-year uptrend [in gold prices]."

Dollar gold prices have risen steadily since the collapse of Lehman Brothers in September 2008, although the trend has seen some accelerations followed by corrections.

Based on end-of-month London Fix prices, gold gained 11.4% in August – followed by a 10.7% drop last month.

In May 2009 gold prices rose 10.4%, only to retreat by 4.2% a month later, while November of that year saw a 13.1% rise – followed by a 7.5% drop in December.

Over in the US, "Many districts described the pace of growth as 'modest' or ' slight' and contacts generally noted weaker or less certain outlooks for business conditions," according to the latest Federal Reserve Beige Book – its eight-times-a-year anecdotal survey – published yesterday.

"The crisis has forcefully reminded us," Fed chairman Ben Bernanke said earlier this week, "that the responsibility of central banks to protect financial stability is at least as important as the responsibility to use monetary policy effectively in the pursuit of macroeconomic objectives."

Bernanke also suggested that "communication about future policies" can now be used "to a greater extent than in the past" in the execution of monetary policy.

"Bernanke's emphasis on "communications" is likely code for "targeting" nominal GDP or unemployment," Bill Gross, founder of world's largest bond fund Pimco, said on Twitter.

News agency Bloomberg meantime reports that third quarter earnings for Wall Street's largest firms show the worst quarter for banks since the financial crisis began.

By Ben Traynor
BullionVault.com

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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

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