Gold Eyes Europe Stress Tests for Direction

2010-JUL-23

From the GoldMoney News Desk --

The major event affecting precious metals this week is bank stress tests being carried out in the Euro zone. On Friday, 91 European banks are going to be tested to see how they would cope in the event of economic conditions worsening further. In one section of the testing, banks have been asked to estimate how much capital they would need to cater for two specified scenarios. Many analysts disagree over the effectiveness of these tests and accuse the ECB of not being transparent enough, which makes the effects on the market difficult to predict.

The results of the stress testing will affect the gold price, however in which way is not yet clear. The state of the European economy is not exactly a secret (especially in Greece, Italy, Ireland, Spain and Portugal) but it seems to be general opinion that most banks will meet the criteria to pass the tests. And, if the results show that the worse-off economies are better prepared than expected it could have an adverse effect on the gold price as conditions will be seen as more stable and therefore dent the safe-haven appeal of gold.

A Bank of America-Merrill Lynch analyst commented: “There is no apparent trigger for gold to move higher at the moment, especially with the situation in Europe a bit more under control. Against that backdrop, we have been drifting.”

Gold was under pressure this week as risk appetite reappeared and equities gained. The yellow metal started to fall on Friday last week, reaching a 2 month low on Tuesday at $1,175.35/oz. On Thursday gold recovered to the $1,200/oz mark to await the European stress tests due on Friday at 4.00pm GMT.

Silver fell with gold this week to $17.40/oz on Tuesday but was pushed up towards the end of the week to around $18.20.

Interestingly, the more industrial metals might not fare so badly if the European stress tests go well. Reassurance over the future of the economy could well boost demand for platinum and palladium for use in the car-manufacturing sector.

Platinum and palladium both fell on Tuesday to $ 1,488.05/oz and $431.75 respectively. However both managed to regain their losses into Friday, up at around $1,540 and $460 before the results of the stress test.

All data and quotes sourced from Reuters.