247Bull.com Editor: If the handling of the Cyprus bailout teaches us anything it’s that our political leaders will resort to almost anything to prevent a breakup of the euro. Therefore, those with wealth to protect should not only be concerned about bank runs and the confiscation of their deposits, they should also be concerned about holding physical gold rather that paper derivatives of gold. As Jim Rickards, Senior Managing Director at Tangent Capital, pointed out in a recent interview, “the day you really want your gold is the day the COMEX will be closed”.
U.S. dollar gold prices fell back below $1600 per ounce Monday morning in London, falling back towards where they started last week, as stocks and commodities gained after news that Cyprus has agreed a bailout deal.
“We expect gold to move sideways this week with, however, a tendency for lower prices,” says a note from precious metals refiner Heraeus, adding that it saw increased demand for investment gold bars, with gold “much influenced by worries over Cyprus”.
“[Gold's] price action remains well below the uptrend which was broken in February,” says the latest technical analysis note from bullion bank Scotia Mocatta.
“There is a major base of support in the $1522 area, which will be pivotal to the long-run trend; the risk is for a test of this low.”
Silver meantime dropped below $28.60 an ounce, while US, UK and German government bond prices also fell.
Cyprus has reached agreement with international lenders over a €10 billion bailout deal. The country’s second-largest lender Laiki will close, with shareholders, bondholders and uninsured (over €100,000) depositors set to take losses.
The largest bank, Bank of Cyprus, will take over those assets of Laiki deemed viable. European Union officials have said uninsured depositors at Bank of Cyprus should not lose more than 40%, Bloomberg reports.
The deal also “safeguard[s] all deposits below €100,000 in accordance with EU principles,” says a statement from the Eurogroup of single currency finance ministers. An earlier plan, unveiled a week ago but rejected by the Cypriot parliament, would have imposed a 6.75% levy on deposits below €100,000 and a 9.9% levy on those above that level.
“This solution…doesn’t have the downsides that the solution of last week did,” said Jeroen Dijsselbloem, Dutch finance minister and Eurogroup chair, adding that the agreement now reached was not one of the “political possibilities” a week earlier.
“The Cyprus situation is a dramatic situation but it was well managed,” reckons Dider Duret, chief investment officer at ABN Amro Private Banking in Amsterdam.
“It has not turned into a big systemic fear. We’re not in the abnormal years of the big systemic risks that we’ve seen with Greece or Lehman.”
The agreement means that the European Central Bank will not carry out its threat to cut off Emergency Liquidity Assistance to Cyprus’s banks today as it warned it would do if there were no deal and it had reason to believe banks were insolvent.
In the US meantime, the difference in the number of ‘bullish’ long minus ‘bearish’ short contracts held by gold futures and options traders classed as noncommercial, that is managed money such as hedge funds, rose 3% in the week ended last Tuesday, weekly data published Friday by the Commodity Futures Trading Commission show. The rise took the so-called speculative net long position to its highest reported level since November.
“The gold price rise in the period under review was supported by financial investors,” say analysts at Commerzbank,”as a result of which short-term investors have evidently acquired greater influence again.”
“The underlying moves also smacked of a keenly bullish attitude,” says a note from Standard Bank, adding that short positions were unwound on aggregate while the number of long positions went up.
Last month saw the number of short gold futures contracts rise to its highest level this century.
“The impact of recent events for Eurozone crisis-management ahead offers underlying support for gold,” says UBS.
“The fragile situation in Europe combined with the recent display of vigor from physical demand would make shorts think twice before moving as aggressively as they did last month.”
Over in India, traditionally the world’s biggest gold buying nation, “demand [for gold] is very thin” one trader at a state-run bank told newswire Reuters this morning.
Ben Traynor | BullionVault