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London - Gold rose to its highest in two weeks on Thursday after a coordinated effort by the world’s major central banks to unlock the credit markets and prevent a global financial meltdown gave investors confidence to cut their holdings of cash.
The US Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said they would lower the cost of existing dollar swap lines by 50 basis points from December 5, and arrange bilateral swaps to provide liquidity for other currencies.
The euro rallied for a fourth day, while US stocks rose after data showed manufacturing activity in the world’s largest economy.
Gold was last flat on the day at $1 746.40 an ounce by 1244 GMT, having risen to a session peak of $1 754 earlier, its highest since November 17. Gold rose 1.9% in November, clocking up a seventh month of gains so far in 2011, but was still 9% below September’s lifetime high at $1 920.30.
Gold’s correlation with copper is close to 66% now, up from about -10% in late September, while that with the dollar index is at -53.0%, compared with 3.0% at that same time.
Gold can often gain in an environment of rising price pressures as it can help protect an investment portfolio from the impact of inflation, because it rises in line with other assets.
The market has turned more bullish on the longer-term prospects for the gold price, regardless of the headwind posed by the stronger dollar or greater investor optimism, which can cut the need for gold as a safe haven asset.
The bulk of open interest in gold call options, which give the owner the right but not the obligation to buy the gold at a set price by a set date, in 2012 is clustered at $2 000/oz.
Following stocks
European equities recovered from earlier losses to trade broadly flat on the day. Gold’s correlation with European shares reached its most positive in a year by the end of November, trading around 65%, meaning gold is more likely to move in tandem with shares.
The euro steadied, pulling back from Wednesday’s highs hit after the coordinated action by the central banks. However, speculation the European Central Bank could aggressively cut rates could temper gains in the single European currency.
Gold priced in euros was last down 0.2% on the day at €1 295.42/oz, after having gained almost 5% in November, its largest monthly rise since August.
“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 sterilised, and would effectively be another form of easing,” wrote UBS analyst Edel Tully.
“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.
"We only need to look back to 2008 for a reminder that a dollar funding crisis is not gold’s friend,” she said.
Gold tumbled to its weakest in nearly a month last week after declines in equities sparked a selloff in the bullion markets to enable investors to cover losses in other markets.
Retail investors have been cautious, with dealers in Asia reporting hesitation by jewellers to buy in such a turbulent environment.
Premiums for physical delivery in Hong Kong have this week fallen to their lowest in three months, although forecasts for demand in China, the world’s second-largest consumer of gold after India, anticipate continued strength.
China’s gold consumption will be around 750 tonnes this year, Albert Cheng, a managing director for the World Gold Council, told an industry conference in Shanghai on Thursday.
In other precious metals silver, which fell nearly 4% in November, was last up 1.0% on the day at $33.14/oz. Platinum was up 0.1% at $1 553.75/oz, while palladium rose 2.1% to $618.72/oz.
The US Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said they would lower the cost of existing dollar swap lines by 50 basis points from December 5, and arrange bilateral swaps to provide liquidity for other currencies.
The euro rallied for a fourth day, while US stocks rose after data showed manufacturing activity in the world’s largest economy.
Gold was last flat on the day at $1 746.40 an ounce by 1244 GMT, having risen to a session peak of $1 754 earlier, its highest since November 17. Gold rose 1.9% in November, clocking up a seventh month of gains so far in 2011, but was still 9% below September’s lifetime high at $1 920.30.
Gold’s correlation with copper is close to 66% now, up from about -10% in late September, while that with the dollar index is at -53.0%, compared with 3.0% at that same time.
Gold can often gain in an environment of rising price pressures as it can help protect an investment portfolio from the impact of inflation, because it rises in line with other assets.
The market has turned more bullish on the longer-term prospects for the gold price, regardless of the headwind posed by the stronger dollar or greater investor optimism, which can cut the need for gold as a safe haven asset.
The bulk of open interest in gold call options, which give the owner the right but not the obligation to buy the gold at a set price by a set date, in 2012 is clustered at $2 000/oz.
Following stocks
European equities recovered from earlier losses to trade broadly flat on the day. Gold’s correlation with European shares reached its most positive in a year by the end of November, trading around 65%, meaning gold is more likely to move in tandem with shares.
The euro steadied, pulling back from Wednesday’s highs hit after the coordinated action by the central banks. However, speculation the European Central Bank could aggressively cut rates could temper gains in the single European currency.
Gold priced in euros was last down 0.2% on the day at €1 295.42/oz, after having gained almost 5% in November, its largest monthly rise since August.
“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 sterilised, and would effectively be another form of easing,” wrote UBS analyst Edel Tully.
“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.
"We only need to look back to 2008 for a reminder that a dollar funding crisis is not gold’s friend,” she said.
Gold tumbled to its weakest in nearly a month last week after declines in equities sparked a selloff in the bullion markets to enable investors to cover losses in other markets.
Retail investors have been cautious, with dealers in Asia reporting hesitation by jewellers to buy in such a turbulent environment.
Premiums for physical delivery in Hong Kong have this week fallen to their lowest in three months, although forecasts for demand in China, the world’s second-largest consumer of gold after India, anticipate continued strength.
China’s gold consumption will be around 750 tonnes this year, Albert Cheng, a managing director for the World Gold Council, told an industry conference in Shanghai on Thursday.
In other precious metals silver, which fell nearly 4% in November, was last up 1.0% on the day at $33.14/oz. Platinum was up 0.1% at $1 553.75/oz, while palladium rose 2.1% to $618.72/oz.
