GOLD AT 2-WEEK HIGH ON CENTRAL BANKS’ ACTION

by Goldline.com | December 01, 2011

Gold prices are at 2-week highs after Wednesday’s action by the world’s largest central banks to loosen credit markets and provide more dollar liquidity. Beginning December 5, the central banks will reduce the cost of existing dollar swap lines by 50 basis points through February of 2013. According to UBS analyst Edel Tully, "There is a twofold impact on gold from the joint policy response from central banks. First, a substantial increase in the demand for dollar swap facilities would mean further expansion of the Fed's balance sheet, if lending is not sterilized, and would effectively be another form of easing. The downward pressure this puts on the dollar is clearly to gold's benefit… “Second, to the extent that the cheapening of dollar funding costs limits the possibility of a liquidity crunch, it is also beneficial for gold.” (Reuters, 12/01/11)

U.S. stocks are lower after yesterday’s rally which was spurred by the central bank action to increase global liquidity. "The coordinated move was welcomed by the market, but the fact that central banks saw the need for such measures confirms how serious the bank funding situation is," Gary Jenkins, head of fixed income at Evolution Securities, said in a research note. "Though it is clearly helpful and should ease some of the tension in money markets it does not alter the underlying problem with European sovereign debt," he added.

Also pressuring equities was the latest report on the health of the U.S. job market. The government said today the number of people filing for initial unemployment benefits rose by 6,000 to 402,000. The monthly jobs report is due Friday. (CNN Money, 12/01/11)

†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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