Desperate Central Bank to Benefit Gold

September 12, 2012 – The spot price of gold reached a new six-month high at $1,746 per troy ounce on Wednesday morning, as stocks and the euro rallied after Germany’s Constitutional Court ruled in favor of the European Stability Mechanism, a 700 billion euro fund created to tackle the region’s sovereign debt issue.

The latest technical analysis from Scotia Mocatta, a bullion bank, indicates price action is bullish with support at $1,700 per troy ounce and a target on the upside at $1,790 per troy ounce.

The price of silver traded up to $34.16 per tory ounce, a six-month high as well, as other commodities were broadly flat.

Markets continue speculation ahead of the press conference following the two-day Federal Open Markets Committee meeting, which commences today. Many investors and analysts are expecting some stimulus from the Federal Reserve. An oft-quoted source, predicting the Fed could be about to open the floodgates, called the position of the central banks “desperate.”

In currency markets, the US Dollar Index, which measures the Dollar’s strength against other major currencies, dropped below 80 for the first time since May yesterday after a ratings update from Moody’s that warned the US could lose its Aaa rating next year if legislators fail to agree to measures that can stabilize and then reduce the U.S. debt-to-GDP ratio.

The euro hit a four-month high against the dollar, as the German Constitutional Court rejected challenges to the legality of Germany’s ratification of the European Stability Mechanism and European fiscal pact.

The European Central Bank last week announced a program of unlimited secondary market government bond purchases, which is intended to reduce differences in borrowing costs across European members.

In the U.S., the Federal Reserve begins its two-day Federal Open Markets Committee meeting today, ending with a press conference by Ben Bernanke tomorrow.

Steve Barrow, a head of G10 research at Standard bank, cited the examples of the ECB as well as Switzerland’s central bank, when he said that central banks are increasingly threatening unlimited action in a bid to force the market to take heed. In his analysis, the SNB and the ECB have shown themselves to be desperate, as he puts it.

Barrow sees a similar announcement from the Fed tomorrow as a long shot, but one that can’t be ignored given the direction global central banking has been moving.

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