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Last week gold managed to climb above the $1,750 per ounce mark on the back of the co-ordinated move by central banks to boost liquidity. When the US Federal Reserve allowed central banks to swap their own currencies for US dollars, the dollar fell and gold benefited.

Despite the increase in gold prices, Chinese demand continues to be just as high. Although the Chinese government keeps very quiet about its gold reserves it is believed that China holds in excess of 33.89 million fine troy ounces as its reserves and that this is increasing rapidly. In 2007, China overtook South Africa as the world's largest gold producer and China has been making the most of this cost advantage.

The Chinese however, are also in need of monetary support after The People's Bank of China made it easier for banks to lend more money, by cutting the level of reserves the banks have to hold. Over the past week, China's central bank has had to intervene in the currency markets, but for once, it's not been acting to keep the Renminbi weak against the dollar. The blame lies with China's property bubble which seems about to burst. The good news is that China's attempts to prop up the market appear to be working; but the bad news is that investors are beginning to realise that the Reminbi can fall as well as rise.

Also underpinning the gold price was the continued buying by central banks. South Korea is the latest bank to buy gold in an attempt to diversify its foreign reserves and protect against financial instability. A number of banks have disclosed information about their continuing gold purchases; these include Thailand, Russia and Bolivia. Although gold seems to have currently lost its status as a safe-haven asset, increased demand from central banks is supporting gold prices.

EU leaders will be meeting in Brussels this morning (08/12/11) in order to try and agree on a deal to tackle the Euro Zone debt crisis. Most investors and analysts have labelled this the 'do or die' moment for Europe. It is now apparent that any solution must be credible and enduring; the markets will no longer be fed drips and drabs of false hope. One way or another, EU leaders must announce a viable plan.

Chancellor Merkel and President Sarkozy are calling for renewed contracts between countries that enforce budgetary discipline with automatic penalties for those who overspend. However, similar sanctions were previously included in the contracts and those clearly weren't enforced, so how much difference will this really make?

After Standard and Poor's put all Euro zone countries on credit watch it seems that the main focus is on restoring market confidence and as such EU leaders appear to be hardening their positions. However, if the EU is to survive in the long run there needs to be improved solidarity and collective fiscal union.

The ECB (European Central Bank) has cut its main interest rate back to 1% ahead of the EU Summit. Unfortunately, this is much of the same from the ECB and it doesn't have the authority to do what is necessary to stop the debt crisis worsening. Italy and its debts are too big to be rescued by other governments so instead the attention continues to circle back to whether or not the ECB will have to surrender and print money. Of course gold would benefit from this, as people would seek to invest in gold again, in search of safe-haven assets and protection from inflation.

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By Marko Puustinen
Article Source: http://EzineArticles.com/?expert=Marko_Puustinen