There is good news for the economies in Europe as the European bank stress test passed off without much problems. However, this good news has become a pain for gold prices as the stability in EU economy is set to hit the yellow metal in the international market.
Gold prices last week also witnessed a slide following fall in demand and several economies showing slight improvement. Gold prices in normal circumstances shoot up when there is panic in the market about the stability of any economy. Yellow metal had gained during the Greece, Portugal and Ireland crisis as the safe haven demand witnessed a surge.
However, the European bank stress test has come as a spanner for the raging gold prices. The bank stress tests were lenient and that there were no significant failures. A tough test with no significant failures would have been better news - but at the same time, a lenient test with significant failures would have been worse news.
The European stress tests are less credible than the US stress tests, for reasons laid out by Chris Whalen and many others. They're a bit of a europudding, but they're better than nothing.
European regulators found that seven banks need to raise a combined 3.5 billion euros ($4.5 billion) of capital. Market expectations had ranged from 30 to 100 billion euros.
Germany's Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks didn't have adequate reserves to maintain a tier 1 capital ratio of at least 6% in the event of a recession and sovereign-debt crisis.
More than a dozen others scraped through with just over the required 6% of Tier 1 capital in the most stressful scenario.
The banks that failed the stress tests are in close contact with national authorities over how they will raise capital.
A number of analysts are questioning the credibility and toughness of the tests saying they did not go so far as to test against the possibility of an outright sovereign default.
Losses were only considered on government debt held in banks' trading books rather than on those bonds that they intended to hold to maturity.
All these positive signs have impacted the gold prices in the global market and this has added to the slide in gold prices. Now, gold traders are looking for further demand from India during the festival season starting in August.