Gold Gains on Week, Central Banks Should "Create and Inject More Money" to Fight "Worst Ever Crisis"

By: Ben_Traynor

SPOT MARKET gold prices spiked 0.5% to $1661 an ounce – within 1% of this week's high – immediately following news of better-than-expected US jobs data on Friday. The gold price did however hand back all its gains within half an hour.

Stock markets and industrial commodities also rallied on the release of US nonfarm payrolls, which showed 103,000 nonagricultural jobs were created last month. Last month's report showed no jobs were added in August – though this has now been revised up to 57,000.

"[However,] long-term support for gold and silver from continued concerns over a possible US recession remains in place," reckons Marc Ground, commodities strategist at Standard Bank.

"In addition, Eurozone debt problems will also continue to remain a focus, and consequently benefit precious metals."

Going into the weekend, gold prices are up more than 1.5% and heading for their first weekly gain in five weeks.

Silver prices also spiked following the nonfarms release, before they too fell, dropping back towards $32 per ounce for a weekly gain so far of around 6.7%.

"Gold and silver are our top commodity picks heading into 2012," says a report from Morgan Stanley out today.

"Gold, and silver to a much lesser extent, are viewed as safe havens and store of value as well as the closest thing to a global reserve currency."

The British government fears it may have to pump more money into Royal Bank of Scotland – which received the world's largest bailout three years ago at £45 billion – as part of a Europe-wide move to recapitalize the banking sector, according to a front page story in today's Financial Times.

RBS has sought to play down the story, telling news agency Reuters that its exposures to Greek debt "are modest relative to core Tier 1 capital".

Ratings agency Moody's meantime announced Friday it has downgraded RBS by two notches from Aa3 to A2. Moody's has also downgraded another eleven UK financial institutions, including Lloyds TSB, Santander UK, Co-Operative Bank and Nationwide Building Society.

"The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government," said a Moody's statement.

"The right thing at present is to create some more money to inject into the economy," said Bank of England governor Mervyn King yesterday, following the Bank's decision to expand its quantitative easing program by £75 billion.

"This is the most serious financial crisis we've seen at least since the 1930s, if not ever."

Over in Europe, the process of approving the EU agreement of July 21 – which includes granting the European Financial Stability Facility powers to recapitalize banks – goes on.

The Netherlands yesterday approved the agreement, while in Slovakia meantime the Freedom and Solidarity party has tabled a compromise proposal to its three ruling coalition partners that a committee be set up to decide how EFSF funds would be used in the country.

The European Central Bank's Governing Council meantime "does not consider it would be appropriate that the central bank would leverage the EFSF," outgoing ECB president Jean-Claude Trichet said yesterday.

The central bank did say it will launch a new €40 billion asset purchase program. The program will target covered bonds – debt back by the cash flow of underlying investments, adding further details will emerge next month.

The ECB resisted calls for an interest rate cut, leaving its rate at 1.5%.

"But [Trichet] did do what was necessary to avoid a counter-productive market response," notes the FT's Lex column.

""By shifting the ECB's language to say that policy was no longer 'accommodative', he made it easier for his successor, Mario Draghi, to cut."

"There has been a recent shift in central banking across the world," adds Gerard Lyons, chief economist at Standard Chartered Bank in London.

"In the West toward easing and in emerging markets putting tightening on hold with an option to ease if necessary."

In New York, meantime, the Occupy Wall Street protest – which has seen demonstrations against US banking sector bailouts – nears the end of its third week.

The protest – which has drawn media comparisons to the Arab Spring – has steadily grown since September 17, when a handful of protesters pitched a tent outside the New York Stock Exchange, and has spread to other US cities.

"The government's doing the work for us," said one protester when asked to explain the movement's growth.

"All they have to do is cut some more people's insurance and unemployment benefits and it won't be a bunch of 20-year-old white college students out here."

The State Bank of Vietnam meantime has said a number of banks can reopen gold trading accounts on the international market, news agency Reuters reports.

The SBV banned international gold dealing 15 months ago in an effort to close the gap between global and domestic gold prices.

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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