Gold Falls with Euro as Cyprus Imposes “Flexible” Capital Controls

Wholesale gold bullion prices fell as low as $1591 an ounce Wednesday morning, extending losses from a day earlier following news of Cyprus’s bailout as well as positive US economic data.

Data published Tuesday showed better-than-expected growth in US durable goods orders for February, as well as 8.1% year-on-year house price growth for January as measured by the Case-Shiller Indices – the strongest year-on-year house price growth since 2006.

US consumer confidence however has dipped this month, according to figures from the Conference Board.

“The [safe haven] Cyprus support is not there anymore and the US data, which on balance has been quite good today, is also being a drag for the [gold] market,” said HSBC precious metals analyst James Steel last night.

Silver hit a four-week low at $28.25 an ounce, while stock markets also sold off along with the Euro, which hit a four-month low against the Dollar.

Cypriot authorities are expected to announce details of capital controls later today, with early reports saying they limit foreign transactions but not movements of money within Cyprus.

The controls will be “very differentiated” according to a particular bank’s circumstances, finance minister Michael Sarris said yesterday, and will be in place for seven days before being reviewed.

“Our intention is to limit it as much as possible,” Sarris told the Financial Times.

“We are trying to figure out a sensible set of measures that is flexible enough to allow the functioning of the economy.”

Cyprus’s central bank said it still expects banks to reopen tomorrow with restrictions.

“If Joe Sixpack in Spain or Italy or wherever is thinking the troika are circling their country in the future, it is entirely rational, as Mervyn King suggests, to panic,” says Societe Generale analyst Albert Edwards, referring to comments the Bank of England governor once made saying that it was rational to join in a bank run once one was underway.

The governor of Malta’s central bank meantime has rejected reports that his country, along with Luxembourg, could face a similar fate to Cyprus.

“The problems facing Cypriot banks include losses made on their holdings of Greek bonds,” Josef Bonnici said, “whereas Maltese domestic banks have limited exposure to securities issued by the [Eurozone bailout] program countries.”

Yields on Spanish 10-Year government bonds ticked back above 5% this morning, while market yields on Italian bonds also rose. At an auction of Italian government debt this morning, yields on 5-Year bonds rose compared to a similar auction last month while those on 10-Year bonds fell.

Pier Luigi Bersani, whose political bloc came first in last month’s Italian elections, met with leaders of the Five Star Movement (M5S) this morning, the party that got the biggest single share of the popular vote, for talks on forming a government. M5S said it will not support a Bersani government but would “provide maximum support on specific acts”.

Bersani is expected to tell Italy’s president today or tomorrow whether or not he can form a government.

“If Bersani says he can’t form a government the mantle could pass to [former prime minister Silvio] Berlusconi or [M5S leader Beppe] Grillo to try,” says a note from Standard Bank currency analysts.

“That would probably un-nerve the markets although their ability to form a workable government would be doubtful and this route may well end up taking Italy to new elections in a very short space of time…Perhaps we should say that if Bersani manages to form a government it will be less bad than if he does not. ”

Britain’s economy shrank by 0.3% in the final three months of 2012, gross domestic product figures published this morning confirmed. A second consecutive contraction registered in the current quarter would mean a so-called ‘triple-dip’ recession.

Japan’s central bank “will consider every policy option to implement effective monetary easing” its new governor Haruhiko Kuroda said Wednesday.

“There’s no going back now,” says Masaaki Kanno, chief economist at JPMorgan in Tokyo.

“This means they won’t think about anything else until they reach the 2% inflation target.”

Ben Traynor | BullionVault

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