Commodities Volatile while some banks mask write-downs

The Gold Price fell to $1643 per ounce by Tuesday lunchtime in London – still 1.1% up for the week so far – while stocks and commodities suffered another battering as Greek debt fears once again rattled the markets.

Copper fell 1.9%%, while WTI crude oil lost over 2%, dropping to $76 a barrel.

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The Silver Price dropped to $30.21 – 0.8% up on last Friday's close.

"Gold continues to benefit from the current pessimism regarding the global economy [and] the realisation that the Eurozone debt issue is far from being resolved," says today's note from Standard Bank's commodity analysts.

"We expect physical [gold] demand to be quite decent in the coming days," adds Edel Tully, precious metals strategist at UBS.

"After the recent washout, gold positioning is far from extended, and this is quite a bullish signal for price strength ahead."

Stock markets meantime fell Tuesday for the fifth session running, with the FTSE100 here in London dropping through 5000 – a level it first crossed on the way up in August 1997.

The finance ministers of France and Belgium today pledged to "step in" if necessary and bail out the part-nationalized Dexia banking group.

Dexia received a bailout worth around €6 billion in 2008. Its share price fell to a low of €0.81 Tuesday morning – 44% below where it closed last week – after ratings agency Moody's placed Dexia on review for downgrade, citing "concerns about the group's sizeable reliance on short-term funding and the consequent liquidity gaps".

Last week Fitch, another ratings agency, referred to Dexia's "structural weakness" and warned that the bank faces growing difficulties in getting access to funding.

Several European banks have now "marked to market" the Greek government bonds they own, making writedowns of 50% or more. But others – including French banks BNP Paribas and Societe Generale and the Franco-Belgian Dexia Group – have so far only recorded the 21% loss agreed at a Eurozone summit in July.

"It's no coincidence that the banks with some of the biggest holdings of Greek debt took the smallest writedowns," says Peter Hahn, professor of finance at Cass Business School in London and a former managing director at Citigroup.

"You've got banks, which are supposedly comparable, putting different values on their assets. That destroys the credibility of the banking system, and is one of the reasons why the shares are being hit so badly."

"The market is increasingly worried about the potential of the Greek crisis and the calamity that could be created if there was a messy default," says Jane Foley, senior currency strategist at Rabobank in London.

"We could be in for a shakeout even larger than the Lehman shock," adds Hideki Amikura, Tokyo-based foreign exchange manager at Nomura Trust Bank.

"While last week saw precious metals largely following equities on a downward slope, gold and silver's moderate gains this week are a positive sign that they are returning to favor on haven demand," reckons one bullion dealer here in London.

"Investors will be reassured that last week's rout [of gold] was driven more by a flight to cash to meet margin calls and mitigate losses on equities than by a fundamental shift in perceptions of gold's value."

Luxembourg prime minister Jean-Claude Juncker, who chairs the Eurogroup of single currency finance ministers, confirmed Tuesday morning that he has cancelled a meeting of Eurozone ministers scheduled for October 13 to discuss whether or not Greece should receive the next installment of its bailout funding, worth over €8 billion.

The cancellation follows Greece's announcement on Sunday that it expects to miss its deficit-cutting targets for 2011.

Greek finance minister Evangelos Venizelos said today that the government has enough money to last until mid-November if the next installment is delayed. He has previously said it would run out of money by the middle of October.

Dollar and Sterling Gold Prices remain broadly where they closed on Friday 23 September, while the Euro Gold Price is up 1.7% over the same period. In the so-called commodity currencies, the Gold Price has risen 2% against the Canadian Dollar in that time and 3.4% against the Australian Dollar – recovering most of the losses in that currency incurred towards the end of last month.

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Ben Traynor, 04 Oct '11
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.