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Central Banks Take Joint Action Amid Crisis

Release Date: 
Friday, September 16, 2011

The European Central Bank said it would coordinate with the U.S. Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank to ensure its banks have access to unlimited dollar funding through the end of the year. The move lifted stock markets, including battered European financials, as concerns eased over the banks’ ability to meet its obligations. European banks require U.S. dollars to fund loans to companies and consumers around the world along with dollar-denominated securities they hold. U.S. banks have been reluctant to lend dollars to European banks because of the debt crisis.

The coordinated central bank actions pushed gold to two-week lows on Thursday, but analysts at Deutsche Bank and UBS were optimistic in their outlooks for gold assets. "We view the latest correction in gold as temporary," Michael Lewis, head of commodities research at Deutsche Bank AG in London, wrote tin a report. Prices "will keep on rising in an environment where concerns toward the global banking system remain."

The last time the five central banks jointly agreed to make longer-term dollar funding available was May 2010, at the height of the Greek debt crisis. In October 2008, another major joint action occurred when many of the largest central banks jointly cut interest rates in the wake of Lehman Brothers' collapse.

"Yesterday's announcement has taken away some stress out of the market," said Walter de Wet, analyst at Standard Bank. "But gold has rebounded nicely from its lows this morning, we've seen fairly decent buying out of Asia," the analyst noted. "Over the past couple of weeks whenever gold falls below $1,800, we've seen good buying, especially in Shanghai."

"This will not change the root of the problems with banks, which is the debt crisis," said Marco Valli, economist at lender UniCredit, discussing the central bank moves. "That requires a political solution." Thursday's action "is positive in the sense that central banks are moving in tandem," said Sara Johnson, economist at consultancy IHS Global Insight. "But realistically there is very little room to maneuver."

European rescue funds of $352 billion have flowed to Greece, Ireland and Portugal, along with 18-months of government and international coalitions fighting the debt crisis. These efforts failed to stabilize markets as debt problems spread to Italy and Spain. "They’re only really geared to put out spot fires and play brinkmanship, rather than to deliver a killer package that will actually resolve all their issues," said Tom Price, an analyst at UBS AG. "In that environment, the problem drags on for years, not months, and it’s a great environment for gold."

On Friday, the euro fell versus the dollar on concern that the collateral required by some nations to take part in another Greek bailout could preclude European officials from reaching agreement on another bailout. European Central Bank President Jean-Claude Trichet pressed euro-area governments to take decisive action to halt the debt crisis and show "unity of purpose" at the meeting. Finnish Finance Minister Jutta Urpilainen said agreement on collateral was unlikely.

(Sources: "Central Banks Pour Dollars Into Europe," Wall Street Journal, September 16, 2011; "Gold May Climb as Concern About European Crisis Stokes Investment Demand,"Bloomberg, September 16, 2011; "PRECIOUS-Physical buying helps gold bounce from 2-week low," Reuters, September 16, 2011)

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†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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