Gold and silver prices rallied last week as uncertainty around the future of Cyprus, and of the European Union as a whole, spurred demand for safe-havens.
Cyprus struck a last-minute bailout deal early today, avoiding a much-feared collapse of its banking system. The plan foresees the closure of Cyprus’ second largest bank, Popular Bank of Cyprus, with unsecured depositors with deposits above EUR100,000 potentially losing the remainder of their savings and both junior and senior bond holders being completely wiped out.
Unsecured depositors at the Bank of Cyprus also risk losing a portion of their deposits. The deal sets a precedent of losses to be sustained by depositors and senior bond holders. The deal risks reducing the already shaky confidence of depositors in other European banks and has reminded investors of continued unresolved large financial system and sovereign debt vulnerabilities. Gold naturally benefits from these concerns. [Cyprus Puts Gold ETFs in Focus]
Gold attracts buyers as Cyprus debacle spooks investors. Accompanying the rise in gold price, COMEX net speculative long positioning in gold rose by 25,702 contracts in the week to last Tuesday, marking a 5-week high in net longs. Depositors are likely to look for a new home for their money when Cypriot banks open up tomorrow. That could benefit gold ETPs, which were globally still seeing redemptions last week.
Key events to watch this week. Cyprus will likely remain in focus as details of the newly-agreed bailout will unfold this week. On the data front, there will be a series of US economic releases this week, including Q4 GDP, PCE prices, housing statistics and a widely observed measure of the consumer confidence. Strong numbers are likely to confirm the improving growth outlook, providing support to more cyclical commodities. German retail sales and unemployment rate will also be released this week and will be monitored closely for signs of the European crisis spreading to the core.
ETFS Physical Swiss Gold Shares (SGOL)
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- Bank of Cyprus