2011-09-17

Dollar liquidity provisions are unlikely to be a game changer for the gold

Dollar liquidity provisions are unlikely to be a game
The gold price held steady near $1811 per ounce Friday closing as markets await the outcome of a meeting among euro zone finance ministers in Poland. While the price of gold stabilized, the euro currency slid 0.7% to 1.3779 against the U.S. dollar. Equity markets in Europe shrugged off the euro’s weakness to post modest gains. U.S. markets nonetheless looked to open slightly lower, with S&P futures down 2.50 points at 1,201.75.

The primary catalyst for this week gold price weakness was the announcement of a coordinated effort among several of the world’s largest central banks – including the ECB, Fed, Bank of England, Bank of Japan, and Swiss National Bank. The measures involved adding U.S. dollars into the European financial system to combat concerns over the health of many euro zone banks. This latest display of financial assistance in Europe fueled selling in investments tied to the gold price and buying in cyclically-sensitive equities and commodities. The euro currency also surged on the news, from near 1.37 to as high as 1.3885 against the dollar.

Commenting on the gold price sell-off and broad-based market rally, RBC Capital Markets gold strategist George Gero wrote in a note to clients that “Sell stops are being placed by funds looking at other assets as strong stocks are a headwind and gold, while important as an asset allocation, seems to have reached lofty levels.” Gero went on to say that “ECB is conducting dollar operations and temporarily there could be more stability after wards in the euro zone.”

While the gold price may face additional headwinds from these measures in the short-term, the dollar liquidity provisions are unlikely to be a game changer for the gold or the European sovereign debt crisis over the longer-term. The reason is that while they may help to shore banks’ short-term funding needs, they do not address their sovereign debt exposures.

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