The move Wednesday by the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, Bank of Canada and Swiss National Bank served notice that the major world central banks are in unison on making sure the European Union debt crisis does not spread into a worldwide financial contagion. Earlier in the day China announced it is dropping its reserve requirement ratio for banks by 0.5%. That in effect eases monetary policy and is an overt signal from China that it wants its economy to grow and it will accept more commodity imports to achieve its better economic growth. The coordinated central bank move and the China move are very significantly bullish for commodity markets, including the precious metals.
U.S. and European stock markets rallied on the news, along with commodity markets. There was also more fresh upbeat U.S. economic data released on Wednesday. The “risk on” trading day was also bullish for gold and silver.
On the European Union debt crisis front, a major credit agency overnight downgraded its ratings of major world banks. This move was not a big surprise to the market place, but it served to initially cool the “risk on” trader mentality that had been in place so far this week. If history repeats itself, the EU crisis will once again roil the market place. While gold has not recently seen fresh safe-haven investment demand due to the EU debt crisis, my bias is that any serious escalation in the crisis, such as the EU starting to break up, would see good safe-haven demand come back into the gold market.
