Gold Jumps after Central Banks Launch 'Prudent' Liquidity Measures
Source: Ben Traynor, BullionVault (11/30/11)
"As well as strengthening dollar liquidity provision, the central banks 'judge it prudent' to make arrangements to offer enhanced liquidity provision in other currencies."
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank will all lower the price on existing dollar liquidity swap arrangements by 50 basis points (0.5 percentage points), effective Monday.
As well as strengthening dollar liquidity provision, the central banks "judge it prudent" to make arrangements to offer enhanced liquidity provision in other currencies "so that liquidity support operations could be put into place quickly should the need arise," a Bank of England statement said. On the currency markets the dollar fell sharply following the central banks' announcement.
Despite its rally, the price of gold bullion this lunchtime remained only marginally above where it began the month.
Spot market silver bullion prices also surged--jumping 3.5% to $32.51 per ounce in the space of 36 minutes--while stocks and commodities also rallied.
By Wednesday lunchtime in London the FTSE was up over nearly 3% on the day--while Germany's DAX was up more than 4%.
A few hours earlier, ratings agency Standard & Poor's cut its ratings on 15 of the world's largest banks late Tuesday--while at the same time raising its rating for two Chinese banks.
Bank of America, Barclays, Citigroup, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland and UBS all had their debt ratings cut by one notch each--reportedly as a result of changes in ratings methodology at S&P.
Despite this technical explanation, the downgrades "will likely raise concerns about their short-term funding," says Andrew Fraser, investment director at Standard Life Investments, speaking before the central banks' announcement.
"They will be sidelined by money market funds who are the traditional buyers of that short-term paper."
S&P could also change its outlook on France's AAA rating from stable to negative "within a week, perhaps 10 days" reports French newspaper La Tribune, citing an anonymous diplomatic source.
European leaders meantime "are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," European economic and monetary affairs commissioner Olli Rehn said Wednesday.
The next European leaders' summit is due to take place on Dec. 9.
Eurozone finance ministers meantime agreed Tuesday on measures aimed at boosting the euro area's rescue fund, the European Financial Stability Facility.
One mechanism will be a "partial protection certificate" for government bond investors, worth 20--30% of the initial amount invested. These certificates will be detachable and separately tradable, according to an official EFSF statement.
The other measure agreed involves creating "one or more co-investment funds," to attract additional investment.
"Both options are designed to enlarge the capacity of the EFSF," said Klaus Regling, the rescue fund's chief executive.
"[However] it is really not possible to give one number for leveraging because it is a process. . .we will need money as we go along."
The EFSF's current effective lending capacity is €440 billion, backstopped by guarantees from Eurozone governments. Some of that €440 billion is already committed in loans, however, while the guarantees offered by countries like Italy and Spain have been compromised by those countries' recent fiscal difficulties.
There are widespread concerns that the EFSF is not large enough to rescue either of those two nations should they require a bailout.
"We will have to look at the IMF," Dutch finance minister Jan Kees de Jager told reporters after Tuesday's meeting.
"We have talked about leverage though private money, but it would be two or two and a half times an increase so not sufficient. . .I think countries in Europe and outside of Europe should be prepared to give more money to the IMF."
Tuesday's meeting also brought an agreement to release €8 billion of bailout funding to Greece.
A poll of economists by newswire Reuters meantime shows a majority expects the ECB to cut interest rates when it meets next week.
Switzerland has become the number one destination for Italian exports--primarily owing to a large jump in gold bullion shipments, Italian business daily Il Sole 24 Ore reports.
In Vietnam meantime a number of gold bullion refiners are reported to have shut down their processing operations following a central bank draft decree that some fear will hand a monopoly to a single refiner, Saigon Jewelry Co.
The State Bank of Vietnam has previously allocated gold bullion import quotas to refiners, one trader in Ho Chi Minh City says.
"Over the last few months [though] only the Saigon Jewelry Co was allocated quotas.
SBV governor Nguyen Van Binh last week announced that the central bank has "administratively acquired" SJC--the latest in a series of moves aimed at regulating Vietnam's gold market.
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor 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.
(c) BullionVault 2011
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