Gold Gains, ECB "Could Print Euros" to Fund Own Bailout

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"Gold bullion 'has stepped into new territory—acting like a hybrid of a risk asset and a safe haven.'"

SPOT MARKET gold bullion prices climbed to $1687 an ounce Wednesday morning London time—their highest level since September 23—as stocks and commodities also gained despite Slovakia's parliament voting against measures designed to promote Eurozone stability.

"Only a close back above $1684 will [see] the market shift neutral," write technical analysts at gold bullion dealing bank Scotia Mocatta.

However, they add, "a break of $1634 will bring in sellers. . .there is a rising trend line [at that level] drawn off the $1538 low."

Gold bullion "has stepped into new territory," says a note from UBS, adding it is "acting like a hybrid of a risk asset and a safe haven."

Silver bullion hit a three-week high at $33.05 per ounce.

Slovakia's parliament yesterday voted against ratifying the Eurozone leaders' agreement of July 21 that seeks to grant additional powers—including recapitalizing banks and buying sovereign debt on the open market—to the European Financial Stability Facility.

The vote led to the fall of Slovakia's government after junior coalition partner the Freedom and Solidarity party refused to back the motion. Prime minister Iveta Radicova says she will try to hold a second vote this week and seek opposition backing.

The other 16 Eurozone members have already ratified the agreement.

"Eventually a yes vote will be secured," reckons Tim Ash, head of emerging-market research at Royal Bank of Scotland.

"Does Slovakia really want to be alone among 17 Eurozone members states on this one, and when the future of Europe is at stake?"

Elsewhere in Europe, billionaire investor George Soros and 95 others—most of them politicians and finance industry professionals—have written to the Financial Times today warning that failure to fix the Euro's faults could "destroy the global financial system".

They call for a common Eurozone treasury to raise funds for all members—an idea reminiscent of the joint-government 'Eurobonds' that Germany's Chancellor Merkel has described as a "last resort" and "not a sensible idea".

Soros and his co-authors also call for reinforced supervision and regulation, as well as a strategy for economic convergence and growth.

"When voters read this I feel this will have the opposite effect than [the writers] intended," said one comment on the FT's Alphaville blog.

The European Banking Authority—the continent's top banking regulator—has agreed in principle that banks should ensure their core Tier-1 capital ratios would remain above 9% in the event of sovereign debt write downs.

Should this higher Tier-1 ratio be enforced, it will be higher than that expected by many analysts, and may require Europe's banking sector to raise an additional €275 billion, according to Morgan Stanley.

The EBA's July stress tests required a bank's Tier-1 ratios following an adverse shock to remain above 5% to pass—although those tests did not model for a sovereign default.

The impact of sovereign defaults on the European Central Bank, meantime, is "too frightening to contemplate" says Professor David Beim of Columbia Business School.

"Who would bail out the ECB?" he asks, pointing out that a "disproportionate fraction" of the ECB's €1 trillion of assets is likely to be made up of distressed government bonds.

"The endgame is likely to be the printing of Euros and a burst of inflation."

Here in the UK, the unemployment rate rose to 8.1% in the three months to the end of August—its highest level since October 1996—according to official figures published today.

The overall number of unemployed hit 2.57 million, the highest since October 1994.

Over in the U.S., the Senate yesterday approved the Currency Exchange Rate Oversight Reform Act, which would allow the U.S. to impose import duties in cases where it believed the exporter's currency was 'misaligned'. The bill still has to be approved by the House of Representatives and the president.

China's foreign ministry criticized the development, saying it could lead to a "trade war".

Central banks meantime could make net purchases of 500 tons of gold bullion this year, according to leading precious metals consultant Thomson Reuters GFMS, which increased its 2011 forecast from 336 tons on Wednesday.

Ben Traynor
BullionVault

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

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events—and must be verified elsewhere—should you choose to act on it.



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