Bank of England Gives "Systemic Crisis" Warning, Merkel says Eurozone "Will Take Years" to Solve Debt Problem

By: Ben_Traynor

U.S.DOLLAR Gold Bullion prices eased back from a week's high of $1760 an ounce Friday lunchtime in London – straight after the publication of US jobs data – before appearing to bounce off $1750.

Silver prices also fell back, after hitting a week's high of $33.67 per ounce.

Nonfarm payroll data published by the US Bureau of Labor Statistics Friday show that the US economy added 120,000 jobs in November – exactly in line with market expectations.

The US unemployment rate meantime fell to 8.6% - down from 9.0% in October.

Stock markets opened strongly on Friday morning – with the FTSE 100 in London up around 1.6% by lunchtime and Germany's DAX gaining 2.0% – while commodities also gained and US Treasury bond prices fell.

"Recent US data have been slightly more optimistic than what has been factored into the market," said Neil Jones, London-based head of European hedge-fund sales at Mizuho Corporate Bank, speaking before the nonfarm payroll release.

"That's helping risk...the market is in the process of reducing its risk-off positions."

Despite its slight drop following the nonfarm release, gold bullion looked on course for its biggest weekly gain since October – having risen nearly 4% since last week's close.

"The market is betting on some kind of announcement from Europe," reckons Saxo Bank analyst Ole Hansen.

"[Investors are] looking for the liquidity button in Europe to be pressed. That will mean high inflation, and that is giving gold the impetus it has been lacking of late."

German chancellor Angela Merkel however, in a speech to the Bundestag this morning, repeated her objection to the notion that the European Central Bank might follow the Bank of England and the Federal Reserve by embarking on quantitative easing.

"The European Central Bank has a different task from that of the US Fed or the Bank of England," Merkel said, adding that resolving the Eurozone crisis "is a process and this process will take years."

Merkel also again rejected the idea of jointly-issued 'Eurobonds'. European Union leaders are due to meet next Friday to discuss their next steps. 

Elsewhere in Germany, bakery chain Wiener Feinbaecker is advertising a 5-Year bond at 7%, the Financial Times reports – noting that it is an "eloquent sign" that we could be entering another credit crunch.

"When a thriving business with profits growing at 30% a year resorts to this kind of financing, it is a pretty sure sign that banks are not fulfilling their traditional role," the FT report says.

Bank of England governor Mervyn King yesterday warned banks to prepare for a "systemic crisis".

"An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts," he said.

Banks should "give serious consideration to raising external capital in the coming months" warned the BoE's Financial Stability Report yesterday. The report suggests that one way banks could boost cash reserves is reduce the amount they pay in dividends and bonuses.

Although the report encouraged banks "to improve the resilience of their balance sheets", it also cautioned against "exacerbating market fragility or reducing lending to the real economy".

A closely-watched indicator of banking system stress is the gap (or spread) between the London Inter-Bank Offered Rate (the rate at which banks lend to other banks) and the Overnight Index Swap rate (determined with reference to a published overnight rate such as the Federal Reserve's federal funds rate).

Since the start of August, the 3-Month LIBOR-OIS spread has risen from around 12 basis points (0.12 percentage points) to more than 42 basis points. It remains, however, significantly below the levels reached immediately following the Lehman's collapse, when a credit market seize-up sent 3-Month LIBOR-OIS above 350 bps.

Korea's central bank bought 15 tonnes of gold bullion last month – adding to the 25 tonnes it bought earlier in the year.

The Bank of Korea added to its gold bullion reserves "in a bid to diversify its portfolio of foreign exchange reserves," said Lee Jung, head of investment strategy for the BoK's Reserve Management Group.

 "South Korea has huge reserves," says Arne Lohmann Rasmussen, head of rates, foreign-exchange and commodities strategy at Danske Bank.

"When they are buying gold, it's supportive for the market."

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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