Gold Falls with Stocks, Dollar Gains, Greece Default "Could Lead to 2008-style Banking Collapse"

U.S. dollar gold prices dropped to a low of $1832 an ounce just before Monday lunchtime in London ק.3% off Friday's close—as the U.S. dollar showed strength in the face of stock and commodity market falls.

The euro slid to a seven-month low of $1.35 in early trading, while U.S., UK and German government bonds all gained.

"The U.S. dollar's gains are probably more to do with renewed concerns over the possibility that Greece may default on its debt than with increased confidence in the U.S. economy itself," said a gold bullion dealer here in London this morning.

Silver prices meantime fell to $40.86 per ounce —1.3% down on last week's close.

Yields on Greek government bonds continued to set new highs on Monday morning. The benchmark 10 year yield breached 22%, while two year bonds were trading above 64%.

Greece needs "about €2 billion and a bit," to cover its budget shortfall for 2011, Greek finance minister Evangelos Venizelos told reporters on Sunday.

If it does not receive the next installment of its ongoing 2010 bailout, however, Greece will only have enough cash to last until mid-October, according to deputy finance minister Filippos Sachinidis.

German magazine Der Spiegel reported on Saturday that the German finance ministry is preparing for a possible Greek default—as well as Greece potentially leaving the Euro.

"Support for [Greece] appears to be shaking. The market is starting to think the worst could happen," says Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and Banking.

"[The] chances of some sort of default have increased," agrees one bond trader quoted by news agency Reuters.

"Capital preservation is the main consideration right now," observes Fredrik Nerbrand, London-based head of global asset allocation at HSBC Holdings.

"Owning risk is not really top of my agenda."

Despite the apparent growing likelihood of a Greek default, "no European or American bank has, to my knowledge, marked the sovereign debt to market," warns Richard Bove, analyst at Rochdale Securities.

"At some point, a 2008-style run on the debt of these institutions could cause a collapse [in the banking sector]."

Three years ago this week Lehman Brothers filed for bankruptcy, while insurers American International Group (AIG) had to be bailed out.

Gold prices "should benefit from the scaling back of risk appetite on what appear to be rising fears of a Greek default, contagion to the rest of the periphery, and the impact on banks," reckons Edel Tully, precious metals strategist at UBS.

European bank stocks were among the biggest stock market fallers this morning. Deutsche Bank, Germany's largest bank, fell 8.4%, while Commerzbank was down 8.2% and insurance company Allianz lost 5.7%. The DAX as a whole fell 3.5%.

Elsewhere in Frankfurt, Juergen Stark, Germany's representative on the European Central Bank's governing council, unexpectedly resigned on Friday.

Stark cited personal reasons for his departure—though it was widely reported that he was unhappy with the ECB's policy of buying distressed Eurozone government debt.

"The debt crisis could be slowly chipping away at the ECB's anti-inflation credibility and Stark's shock resignation. . .could prove to be the biggest chip yet," says Steve Barrow, currency analyst at Standard Bank.

Here in the UK, the Independent Commission on Banking—which was appointed to examine possible changes to UK banking regulation—published its report on Monday.

The report recommends the creation of a "ring-fence" around retail banks—those that take deposits from individuals—that would prohibit them from engaging in activities as trading derivatives and underwriting share issues.

Over in New York, the number of noncommercial—so-called speculative—long positions held by gold futures and options traders on New York's Comex rose 3.6% in the week ended September 6—while the number of speculative short positions grew 1.9%—according to data from the Commodities Futures Trading Commission.

"After four weeks of successive falls in speculative longs, the past week's increase points to a market that is perhaps turning more bullish on gold," says Standard Bank commodities strategist Marc Ground.

"In addition, with speculative shorts still below last year's average. . .gold looks less vulnerable than it did three weeks ago."

Ben Traynor
BullionVault

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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

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.

(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.