The world’s leading central banks said on Wednesday that they will take coordinated steps to prevent a global liquidity crunch as the euro zone fights to end the debt crisis.
Investor Insights: Gold and Silver Gain After Central Banks Launch Helicopters.
The U.S. Federal Reserve has agreed to lower the cost of existing dollar swap lines by 50 basis points from December 5. The Fed will coordinate with the European Central Bank, as well as the central banks of Britain, Canada, Japan, and Switzerland in a move meant to ease strains in markets and boost the central banks’ capacity to support the global financial system. The central banks will also be able to tap additional liquidity in their own currencies through bilateral swap arrangements set up between them “should market conditions so warrant.” The swap arrangements are good through February 1, 2013. The cost for European banks to fund in dollars rose to the highest levels in three years today after finance ministers failed to boost the region’s bailout fund as much as planned, igniting concerns about a possible breakup of the euro area.
The US dollar (NYSE:UUP) fell as the euro touched a new two week high. Precious metal (NYSEARCA:DBP) investments such as the SPDR Gold Trust (NYSEARCA:GLD) gained nearly 2%, while the iShares Silver Trust (NYSEARCA:SLV) jumped nearly 3% in afternoon trading. Gold miners (NYSEARCA:GDX) Yamana Gold, Inc. (NYSE:AUY) increased 6%, while AngloGold Ashanti (NYSE:AU) gained 7%. Silver miners (NYSEARCA:SIL) such as Hecla Mining (NYSE:HL) and Endeavour Silver (NYSE:EXK) surged more than 7% before the closing bell.
While the reduction in dollar cost borrowing was another bullish sign for precious metals, there is another announcement this morning that deserves attention. Even though China’s (NYSE:FXI) inflation hit a three-year high in July, China appears ready to forget the past. On Wednesday, China cut its bank-reserve requirements for the first time in nearly three years. The WSJ reports, “The People’s Bank of China, China’s central bank, said Wednesday it will cut the reserve-requirement ratio for banks by half of a percentage point, the first such cut since December 2008. The cut essentially frees up banks to lend additional money.” The move is being seen as a policy shift from monetary tightening to monetary easing. The move is estimated to free up around 390 million yuan ($61 billion) in funds for the banks to lend.
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