Could Cyprus give gold a lift?

Uncertainty in Europe and slowing headwinds in the speculative market could be a boost for gold.


Gold has struggled in recent weeks as speculators became increasingly positive about a global recovery and began shifting, particularly, out of gold ETFs.

But, events in Cyprus are threatening to remove this positive sheen from the global growth story and, gold could well benefit as a result.

Writing in its Commodities Daily note, UBS, says, “Gold looks poised to benefit from its safe haven properties amid renewed risks coming out of the Eurozone.”

While, UBS believes the risk of immediate contagion to other peripheral countries remains limited, it says “the Cyprus precedent certainly cannot be shrugged off, particularly if things deteriorate elsewhere.”

Worries over the state of Europe and the potential for contagion could prompt a return of “fear-related” physical buying, the bank says.

According to Commerzbank, the yellow metals upwards moves so far this week are an indication that it is “living up to its status as a safe haven, after the decision about Cyprus taken by the eurozone finance ministers gave rise to considerable uncertainty on the financial markets.”

It adds, ”Gold should profit from the possibility that savings are no longer regarded as safe, and should thus enjoy strong demand in the current market environment. We therefore expect to see prices continuing to rise.”

The main reason for concern on the part of deposit holders, Commezbank says, and the impetus for considering a move into gold, is the condition of the proposed bailout package that, deposit holders will, for the first time have to shoulder part of the bailout burden, through a tax on banking deposits.

It is not only the sentiment towards gold with regards European risk, however, that stands gold in good stead at the moment.

As Standard Chartered pointed out this morning, Gold outflows from ETFs slowed last week, relative to prior weeks.

Last week, the bank says, outflows were USD 541m versus USD 1.2bn the previous week.

Adding, “This source of bearish pressure on gold may be about to reach a trough”.

Commezbank agrees, adding, “The headwind from speculative financial investors has abated noticeably of late: they once again expanded their net long positions by nearly 8% to 44.3 thousand contracts in the week to 12 March. If sentiment amongst money managers should continue to brighten, this could contribute to higher gold prices.”

According to Standard Bank, one of the reasons behind the slowing of these headwinds is that after the week’s strong US non-farm payrolls number and surprise drop in the unemployment rate both of which were negative for gold and the prospect of further Fed stimulus, “participants have come to terms with some of the uncertainty surrounding the timing of an end to quantitative easing.”

“At the very least,” it adds, “the futures market seems to be less concerned about downside.”

And, despite ETFs remaining unconvinced, the bank says, “Gold continues to find strong support and resistance between the $1,575 and $1,600 level. A sustained breakout on either side could see gold rally as option traders hedge their positions. Should gold manage to sustainably break above $1,600, then $1,650 may be the next point of strong resistance. We are biased towards a positive breakout.”


Categories: Business

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