Gold and other precious metals trended upward this week after hitting a recent low on Monday the 19th. The rest of the noble metals followed suit until Friday the 23rd when the results of the European bank stress tests were made public, and investors lost confidence in the Eurozone’s ability to withstand another recession.
Designed to mimic the tests carried out last year in the U.S., the Committee of European Bank Supervisors (CEBS) recently conducted a series of “stress tests” that judged the ability of individual banks from each member country to weather another recession. Among other areas, these tests looked at capital ratios and exposure to home, corporate and interbank loans.
Of the 91 banks tested, 7 failed – 5 from Spain, 1 from Greece and 1 German “landesbank.” Analysts had initially predicted that between 5 and 10 banks would fail, so this fell right in line. What seemed fishy to many onlookers, however, was the amount by which these banks fell short. According to the stress test, in the event of another recession, these banks would need a capital injection of only €3.5 billion – just under 10 times less than what most analysts were predicting. This discrepancy raised eyebrows across the world, and led many to believe that the tests were too soft.
Precious metals responded directly to the release of these test results.
• Gold: Gold marched upward through the end of week. Global investors seized the opportunity to get in gold’s 8-week low, and bid the metal up from just above $1,180 to $1,198.60 at 9:32 a.m., Friday the 23rd. This trend reversed, of course, after the stress test results were released. Seeing the Dollar gain against the Euro, investors shifted interest toward American equities and paper.
• Silver: Silver followed gold throughout the week but diverged the morning of the 23rd when gold took a downward turn. As investors sought to move capital out of gold, some considered Dollar-denominated assets to be riskier than others. These participants chose the relative security of silver, and kept it afloat amidst a declining market.
• Palladium & Platinum: The uncertainty of the outcome of the European stress tests weighed on the minds of market participants this week, as the price level movements of both palladium and platinum. These metals, which normally take a back seat to gold and silver, were in the spotlight this week as they enjoyed marked popularity amid the decline of gold. Palladium closed up 4% this week with platinum not too far behind at 2%.
The ability of global investors to see through the efforts to restore confidence in the European Central Bank should strike fear into the hearts of those holding Euro-denominated assets, and joy into the hearts (and pockets) of those holding precious metals. As market participants seek to diversify their assets in the long run, they will begin to shift capital out of Dollar denominated assets, and into gold, silver, palladium, and platinum.