Gold Drops Back from Week's High

By: Ben_Traynor

WHOLESALE prices to buy gold dropped to $1667 an ounce Thursday morning London time – a 1.3% fall from the week's high set yesterday – while stocks and commodities also fell and US Treasury bonds rose following news that European banks may have to raise fresh capital.

Prices to buy silver dropped to $31.93 – still a 2.5% gain for the week so far.

"Physical interest evaporates at current price levels," said one gold dealer in Hong Kong this morning.

"Enthusiasm for precious metals began to ebb after the New York open yesterday," adds Marc Ground, commodities strategist at Standard Bank – referring to a period Wednesday that saw the price to buy gold fall 1% in four hours.

"Perhaps investors were emboldened by the apparent realization of European leaders that aggressive action needs to be taken...however, the situation remains far from resolved, and markets may be getting a bit ahead of themselves in hoping that decisive action is imminent."

Europe's banking sector may need to raise an extra €200 billion if recommendations by the European Banking Authority are adopted, the BBC's Robert Peston reported Thursday.

Each bank would have to raise its Tier 1 Capital ratio – its core capital as a ratio of total risk-weighted assets – to between 9% and 10%. 

Banks currently need a Tier 1 ratio of 4% to comply with Basel II – the set of accords published by the Basel Committee on Banking Supervision in 2004 – while the EBA's stress tests of July this year were based on a ratio of 5%.

"It's fundamentally wrong to increase capital at the moment," one senior banker told today's Financial Times.

"Deleveraging needs to happen."

The FT reports that some banks may attempt to raise their capital ratios by selling off risk-weighted assets rather than seeking to raise fresh capital from nervous markets. 

"It is not the capital position which is the problem," Deutsche Bank chief executive Josef Ackermann, speaking told a conference in Berlin today.

"[It's]the fact that sovereign debt as an asset class has lost its risk-free status...the key to the solution is therefore in the hands of governments, to restore confidence in the solidity of state finances."

Deutsche Bank has lost €400 million this year on Greek government debt, Ackermann said. 

If the EBA's recommendations were adopted, Deutsche Bank would need to raise €9 billion in additional capital, news agency Reuters reports, quoting people familiar with the bank's finances.

The European Central Bank meantime has repeated its assertion that private creditors should not be compelled to take losses on sovereign debt holdings.

Losses on privately-held debt would have "direct negative effects on the banking sector across the Euro area," it said in its October Monthly Bulletin, published this morning.

"The ECB has strongly advised against all concepts that are not purely voluntary or that have elements of compulsion, and has called for the avoidance of any credit events and selective default or default."

In the US meantime, Wednesday's publication of the latest Federal Open Market Committee minutes reveal disagreement on the merits of so-called quantitative easing.

"A number of participants saw large-scale asset purchases [QE] as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted," the minutes report.

By contrast, "some judged that large-scale asset purchases and the resulting expansion of the Federal Reserve's balance sheet would be more likely to raise inflation and inflation expectations than to stimulate economic activity."

China – the world's second-largest source of private gold demand – saw its trade surplus fall 18% month-on-month in September to $14.5 billion, data published on Thursday show. Exports – in particular exports to Europe – showed a slowdown in growth.

In Dubai meantime, many of those who buy gold have switched their buying patterns towards bullion investment products, the Wall Street Journal reports.

"Earlier while women would buy gold in the form of jewelry, now one can see men, finding themselves with a bit of spare cash, go into a jewelry shop and buying ten-tola [3.75 ounces] bars," says Pradeep Unni, senior relationship manager at Richcomm Global Services, adding that sales of gold coins and ten-tola bars are up 30-40% from this time last year.

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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