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Gold Rally Stalled Although European Banks Not Out of the Woods

The U.S. Comex gold futures started the week on a weaker tone, falling 0.65 percent in the past two days. While the S&P 500 index rebounded 0.65 percent this week, the Euro Stoxx 50 index fell 1.51 percent after falling in the past three consecutive weeks. The Dollar Index rose this week by 0.61 percent, a mirror image of the gold futures.

Gold Investors Took Some Bets Off on Latest Cyprus Developments
The market breathed a sigh of relief when the Cyprus government agreed to shut down its second largest bank, the government-owned Cyprus Popular Bank, in exchange for the Euro 10 billion aid. Depositors with EUR 100,000 or below would not be affected while up to 40 percent of the uninsured depositors in the closed bank would likely be impacted. Market is still waiting to see what type of currency controls the government will impose. The banks are scheduled to be re-opened on 28 March. A currency control for a country which does not have its own currency is a financial novelty according to Bloomberg. Gold price sold off as safe-haven demand decreased after the bailout for Cyprus was agreed. However, banking risks in a no-growth Europe have by no means gone away and could provide some support for gold prices.

Gold Reacting to Stronger U.S. Data
Gold price has also dropped in response to the U.S. stronger durable goods order, which rose 5.7 percent in February, compared to a 3.8 percent drop in January. The U.S. Case-Shiller residential prices index jumped a higher-than-expected 8.08 percent in January after a 6.84 percent jump in December. The Dallas Fed governor (a non-voter) said on 26 March that he favoured dialing back the asset purchases program given the improved tone and growth in the economy.

Hedge Funds Favouring More Gold
According to the CFTC’s latest weekly data, the speculators increased their gold net non-commercial positions to 127,996 contracts, the most since mid-February while speculators raised their bearish bets on copper on the back of the European growth concerns. Barclays noted that even though gold prices have recovered in a short-covering rally, the headwinds remain due to the weak gold-backed ETP flows, a stronger dollar and a subdue physical demand backdrop given the firmer gold prices.

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27 Mar 2013 | Categories: Gold

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