Gold "Seeing Benefit from Safe Haven Demand" as "Political Void" sees Italian Debt Yields Soar

By: Ben_Traynor

U.S. DOLLAR gold bullion prices jumped to $1797 per ounce Wednesday lunchtime in London – more than 3% up from the same point a week earlier – as the European debt crisis continued to engulf Italy.

Silver bullion also rallied around lunchtime – though it remained just below $35 per ounce, where it started today's London session.

Italian 10-Year bond yields meantime breached 7.4%, following Wednesday morning's announcement by clearing house LCH Clearnet SA that it will raise the amount of margin collateral Italian debt traders must posts against potential losses.

Italian 10-Year spreads over German bund yields hit 520 basis points (5.2 percentage points) – while spreads over US Treasuries approached 500 bps – as US, UK and German government bond prices all gained.

"The upwards pressure on Italian bond yields and concern generally for peripheral EU countries has increased the demand for safe haven assets and gold has benefited from that," says James Steel, New York-based precious metals analyst at HSBC.

The Euro dropped 1.5% against the Dollar this morning, while Euro gold bullion prices climbed to €42,322 per kilogram (€1316 per ounce) – over 5% up on the same time last week.

European stock markets meantime sold off heavily, with the FTSE down 1.9% by Wednesday lunchtime – while Germany's DAX was off 2.7%.

Gold bullion briefly breached the $1800 per ounce mark during Tuesday's US session – before falling 1.4% in a little over two hours following news that Italian prime minister Silvio Berlusconi is to step down after Italy's parliament approves new austerity measures. 

Although it won Tuesday's key budget vote, Berlusconi's government was backed by only 308 out of 630 members – with opposition members choosing to abstain – suggesting it has lost its majority.

Italy's president Giorgio Napolitano favors creating a national unity government along the lines of that being negotiated in Greece, according to news agency Reuters. Berlusconi, however, said Tuesday that the only option is a new election.

Over in Athens, Greece was still without a new prime minister Wednesday lunchtime, as politicians continued a third day of negotiations.

"Southern Europe steps into a political void," says one London gold bullion dealer.

Elsewhere in Europe, Spain's two largest lenders – Banco Santander and Banco Bilbao Vizcaya Argentaria – have announced changes to the way they calculate risk-weightings on their assets, following calls from European regulators for banks to maintain higher core capital ratios of around 9%, newswire Bloomberg reports.

So-called risk-weighted asset optimization allows banks to increase capital ratios without selling assets, reducing lending or asking shareholders for more money.

"By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the gamekeeper," says Adrian Blundell-Wignall, deputy director for financial and enterprise affairs at the Organisation for Economic Co-operation and Development.

"That risks making core capital ratios useless."

"It's probably not the highest-quality way to move to the 9% ratio," agrees Neil Smith, Dusseldorf-based bank analyst at German bank West LB.

Other European banks have confirmed they intend to use the practice to reach the 9% threshold – including Germany's Commerzbank and Italy's Unione di Banche Italiane – while Lloyds and HSBC say they have already cut risk-weighted assets by changing models.

"European banks account for more than 50% of international bank lending in all major regions of the world bar Asia, where latest data puts it at just under 45%," says a note from Standard Bank analysts Steve Barrow and Jeremy Stevens.

"If they scale back significantly the contagion effects could be substantial. In fact, this could be more damaging to the rest of the world than the more 'traditional' view of contagion in which recession—and falling import demand—are seen as the main threats to non-European countries...[especially as European banks] seem most keen to slim down Dollar lending as they strive to meet new capital requirements."

Chinese consumer price inflation meantime fell to 5.5% last month – down from 6.1% in September – according to official data published Wednesday. Producer price inflation fell even more sharply – down from 6.5% to 5.0%.

"The balance of risk for the PBOC [China's central bank] and State Council is likely shifting to growth and away from inflation," reckons Tim Condon, Singapore-based head of Asian economic research at ING.

"Lower inflationary pressure leaves room for further policy fine tuning," adds Zhang Zhiwei, chief economist China at Nomura in Hong Kong.

"The PBOC has already marginally loosened liquidity by open market operations in October...we expect this type of fine-tuning to continue, but [reserve requirement ratios] and interest rates will be kept unchanged for the rest of 2011."

China's central bank has raised interest rates five times since last October – the last hike coming in July, when the one year deposit rate was raised to 3.5%.

Over in New York, the world's largest gold ETF, the SPDR Gold Trust (ticker GLD), has seen a net inflow over the past week. The gross tonnage of gold bullion held to back GLD shares rose to 1264.1 tonnes yesterday – a 1.7% rise from this time last week.

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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