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ECB Set to Provide Liquidity to European Banks

Release Date: 
Tuesday, February 28, 2012

Gold prices rose in trading as the markets priced in a massive refinancing operation that the European Central Bank (ECB) is set to offer the euro zone banking institutions. The price of gold was $1780.30 per ounce at 6:30 a.m. Pacific Time on the New York Spot Market with silver at $36.18 per ounce, trading near a five-month high.

The euro reached a three-month high against the dollar ahead the ECB action, which is expected to provide over $600 billion to European banks in the form of three-year, unlimited refinancing. This is in addition to a record $657 billion the bank provided in its first long term refinancing operation which it conducted on Dec. 21. The moves are intended to provide liquidity and buy time for the region's financial system as it addresses debt crises in sovereign nations within the euro zone.

Risk sentiment improved based on the positive European news. Global equities traded near six month highs after Germany's parliament voted to approve a second aid package for Greece and investors anticipated the ECB funding.

"The euro is stronger against the dollar and that's one of the major supportive factors" for gold, said Peter Fertig, owner of Quantitative Commodity Research Ltd. in Hainburg, Germany. Higher equities are "also supportive" for commodities including gold, he said.

Gold prices have risen more than 13 percent so far this year, helped by gains in the euro and weakness in the dollar, easy monetary policy from central banks and other factors. "As long as central banks around the world lean towards further easing, gold will rise further," said Li Ning, an analyst at Shanghai CIFCO Futures.

(Sources: "Gold Advances for a First Day in Three as Weakening Dollar Stokes Demand," Bloomberg, February 28, 2012; "PRECIOUS-Gold inches up on weak dollar with eyes on ECB," Reuters, February 28, 2012; "PRECIOUS-Gold firms with euro, stocks ahead of ECB financing," Reuters, February 28, 2012)

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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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