Stronger Economy “Means Investors Lack Reason to Add to Gold Holdings”, Cyprus Means Markets “Will Now Be Wary of European Depositor Flight”
U.S. DOLLAR prices to buy gold dipped back below $1600 per ounce Tuesday morning in London, though it remained above yesterday’s low hit following news of the Cyprus bailout, while stocks and commodities were broadly flat and US Treasury bonds dipped.
“We continue to target the $1625.77 January low despite Monday’s sell-off,” says Axel Rudolph, senior technical analyst at Commerzbank.
“Given the business cycle is in the ‘recovery’ stage, investors lack a reason to increase their exposure to gold at present,” says a note from Bank of America Merrill Lynch, which today cut its 2013 gold forecast by $10 an ounce to $1670, and its silver forecast from $32.70 to $32.40.
“Nevertheless, we believe markets have become very myopic and prices should pick up as inflationary pressures start to emerge and central banks continue to diversify reserves. Hence, we maintain a $2000 per ounce price target for 2014.”
Russia added to its gold reserves for the fourth month in a row last month, buying just under seven tonnes, according to International Monetary Fund data published Tuesday. Azerbaijan, Belarus, Kazakhstan, Kyrgyz Republic, Mongolia and Ukraine also bought gold in February.
Silver meantime continued to hover close to $28.80 an ounce this morning, in line with where it has spent much of the last three weeks.
On the currency markets, the Euro hovered below $1.29 against the Dollar during Tuesday morning’s trading. After initially ticking higher following the Cyprus bailout agreement, the Euro dropped by more than 1.5% against the Dollar yesterday, following comments from Jeroen Dijsselbloem, chair of the Eurogroup of single currency finance ministers.
“If there is a risk in a bank,” Dijsselbloem said yesterday, “our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.”
Later on Monday however Dijsselbloem “back-tracked a bit” says Standard Bank currency strategist Steve Barrow.
“These sorts of comments perhaps suggest that rather than a new toughness around the bailout process, Dijsselbloem has, perhaps, just been a bit naïve and not appreciated that his comments could spark deposit flight [though we still think], the EU’s approach will be similar in the future should over-extended banking systems require bailouts.”
Following Dijsselbloem’s comments “international investors will be monitoring deposit flows [from European Central Bank data]” says a note from Dutch bank ING.
“[They will] also be looking at Luxembourg and Malta, given that bank assets to GDP is now a popular metric.”
“Now that Cyprus has broken the mold,” agrees INTL FCStone metals analyst Ed Meir, “we would not be surprised to see Europeans funneling their deposits away from banks domiciled in riskier countries to those in stronger ones. This could worsen the banking situation in the process and only intensify the ‘north-south’ divide.”
“If you live in Spain or elsewhere you would look at this and feel much more relaxed about the security of deposits,” counters Jim Leaviss, head of fixed income at M&G.
“It is obviously good news that the Eurozone deposit guarantee remains in place…in some ways it is good that it was tested to destruction, almost failed, but eventually held firm in the face of a collapsing banking system.”
Banks in Cyprus will remain closed until Thursday, according to this morning’s press reports, with a daily withdrawal limit of €100 from ATMs of the country’s two largest banks – one of which is to close as part of the bailout deal – in place since Sunday. Cyprus is also drawing up plans to keep capital controls in place once banks reopen.
“Capital controls are a major step backwards for Europe,” says Andrew Milligan, Standard Life Investments head of global strategy.
“It is very difficult for markets to understand the processes and procedures when a country needs assistance, which adds to the level of uncertainty and risk – even if it is manageable for now.”
Greek branches of Cypriot banks meantime are expected to open tomorrow, according to newswire Reuters, citing the Greek finance ministry.
Nine out of ten business leaders in Italy would support using the country’s gold reserves to collateralize a bond issue, while 85% of the general public would also back the idea, according to an Ipsos-Mori poll commissioned by the World Gold Council.
By Ben Traynor
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben can be found on Google+
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