Wholesale gold leapt 1% against the Dollar and 2.3% against the Euro at the start of Asian trade Monday, as global shares sank and major-government bonds rose following the Cyprus bail-out deal announced by European politicians at the weekend.
“[German negotiators] were hand in hand with Finns,” says an unnamed official quoted by the Financial Times, “who were much more dogmatic” in forcing a levy worth €7 billion on ordinary bank depositors as part of the €17bn deal.
“Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere,” says Bloomberg, while Reuters claims that today’s Bank Holiday may be followed by a forced shutdown on Tuesday to allow parliament to discuss and vote on the depositor levy, priced at 9.9% of savings accounts over €100,000 and 6.7% below.
“It’s as if the Europeans are holding up a neon sign,” writes economist Paul Krugman in his New York Times blog, “saying ‘Time to stage a run on your banks!’…”
“[This is] the first example of deposit hair-cuts during the entire Euro crisis,” says forex strategist Jens Nordvig at Nomura.
The Cyprus deal “has potential to make depositors in Portugal, Spain and Italy nervous, despite likely assurances from policymakers,” he writes.
Weaker Eurozone government bonds fell hard Monday morning, driving Greek interest rates half-a-percentage point higher, while base metals dropped alongside crude oil.
First hitting a 13-session high above $1608 per ounce, Dollar prices to buy gold then slipped back as European stock markets followed Asia in dropping over 1%.
The gold price in Euros jumped 2.3% at the start of Asian trade, hitting 5-week highs above €1240 per ounce as the single currency hit new 3-month lows vs. the Dollar.
Gold priced in Sterling held flat, however, as the British Pound surged nearly 2 cents to $1.51 on the foreign exchange market.
“One of the reasons gold has been coming off,” says UBS analyst Tom Price, “is that there has been a view that the risk in Europe was limited and most of their financial market issues were resolved.
“This uncertainty could provide a brand new support for gold for days or even weeks.”
Further ahead, “Global liquidity is rising,” says London market-maker HSBC, trimming its 2013 average gold forecast from $1730 per ounce to $1700 but noting that “the Bank of Japan has joined the QE party and the Fed shows no let-up.
“Inflation tolerance and currency wars are supportive [of gold]. We expect stronger jewelry and coin demand, lower scrap supply [and] an end to ETF liquidation.”
Investors in gold-backed trust funds led by the $63-billion SPDR Gold Shares cut their holdings last week for the 5th week running, reducing overall exchange-traded gold fund holdings to a new 6-month low of around 2,500 tonnes.
On the futures market, however, speculative traders grew their exposure to rising prices as a group in the week-ending last Tuesday. Latest data from US regulator the CFTC says the net long position of bullish minus bearish bets rose 7.4% from early March’s 54-month low, the fastest jump since September.
“To sustain gold prices at $2000 by 2016″, says analysis from investment bank Merrill Lynch, investors would need to buy gold in quantities equal only to 2008 – almost 50% below 2011’s record 1,700 tonnes – thanks to “steady increases of spending on non-essential items like jewelry in more affluent emerging markets.”
Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.