Gold bullion prices hovered around $1,650 per ounce Thursday morning in London - 1.6% off this week's high - while stocks and commodities continued to rally following rumors of European bank stress tests and proposed recapitalization.
Silver bullion rose to $31.80 per ounce - its highest level so far this week.
"Since the sharp sell-offs two weeks ago, gold and silver have remained relatively stable within the channels $1,600-$1,670 and $29-$31 respectively," said one London bullion dealer this morning.
"A Chinese holiday this week has removed a significant portion of physical interest from the market. If price action remains pent-up to the end of the week, Monday could see a strong breakout, with Chinese interest potentially geared to buying following pre- holiday liquidation."
Gold bullion prices "will continue to push higher in 2012," according to a report published today by commodities strategists at Standard Bank.
"The long-term causal drivers of gold are global liquidity...and real interest rates...global liquidity should continue to grow as long as governments increase their nominal debt burden and/or central banks, such as the US Fed, implement quantitative easing measures."
The European Banking Authority, the main banking sector regulator in Europe, has begun new stress tests of European banks, according to a report in Thursday's Financial Times. The tests, the FT says, could identify capital shortfalls of up to EUR200 billion.
The Wall Street Journal, however, subsequently reported that the EBA denies it is undertaking new tests - while not declining to confirm whether or not it plans to do so.
The EBA's stress test of 91 banks in July was criticized as it did not assess the potential impact of sovereign default. Franco-Belgian banking group Dexia, for example, was found to have twice as much Tier 1 capital as necessary to pass the test.
Dexia's share price has more than halved since the start of July, with investors worried about its potential exposure to a Greek default.
"We are now proposing [European Union] member states to have a coordinated action to recapitalize banks and so to get rid of toxic assets they may have," European Commission president Jose Manuel Barroso said Thursday.
"Policy makers increasingly want to build a large solvency buffer," says analysts at Morgan Stanley, predicting that European banks may need to be recapitalized to the tune of over EUR140 billion.
"We think banks in core Europe need to be recession proofed and banks in the periphery depression proofed."
EU leaders agreed on July 21 that the European Financial Stability Facility - the euro zone's EUR440 billion bailout fund - should be given powers to recapitalize banks if necessary, as well as powers to buy distressed sovereign debt on the open market.
German chancellor Angela Merkel however yesterday reiterated that using the EFSF would be "always tied to a certain conditionality".
The European Central Bank left its main interest rate unchanged at 1.5% today, ahead of Jean-Claude Trichet's final interest rate press conference as ECB president.
Here in London meantime, the Bank of England has extended its asset purchase program from lb200 billion to lb275 billion - effectively launching a second round of quantitative easing.
Asked by bank governor Mervyn King to authorize the move, UK chancellor George Osborne - who this week told the Conservative Party conference to expect "credit easing" ahead - noted in his open reply that the asset purchase facility can hold up to lb50 billion in "eligible private sector assets".
The bank however confirmed after the announcement that it will make "lb75 billion of gilt purchases" - meaning it will continue to buy UK government bonds.
To date, the Bank of England has spent just lb1.1 billion of its existing lb200bn in quantitative easing, all the rest going on government debt.
"The season of QEs has started," said NYU economist Nouriel Roubini on Twitter.
"Fed twist, BoE's QE; BoJ and SNB via FX intervention; ECB as usual will be the last one: too little too late."
The bank left its interest rate unchanged at 0.5% - where it has been since March 2009.
Sterling gold bullion prices jumped 1.3% to lb1082 per ounce immediately following the Bank's announcement, as the pound fell on international currency markets.
Also in London, major clearing house LCH.Clearnet announced Thursday it plans to begin accepting gold bullion as collateral from the end of this month.
"Market participants want greater choice when it comes to assets that can be used as collateral," said LCH.Clearnet director David Farrar.
"Gold is ideal; as an asset it typically performs well in times of financial stress, remains liquid and has a well-established pricing mechanism."
In its press release LCH.Clearnet cited evidence submitted to the Basel Committee on Banking Supervision by the World Gold Council, which suggests gold should be included in banks' Tier 1 assets under the Basel III regulations - scheduled to come into force in 2015.
A recent liquidity survey published by the London Bullion Market Association estimates that the value daily turnover of gold bullion on the London market exceeds $240 billion.
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Ben Traynor is editor of Gold News, the analysis and investment research site of gold ownership service BullionVault. He 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.