Gold ETFs Rally as Cypriot Deposit Scheme Rattles Investors

ETF Trends

News over the weekend that Cypriot bank depositors could face levies totaling EUR5.8Bbn as part of the bank bailout agreement rattled investors and led to a sharp rally in defensive assets.

Investors’ fear that such policy could be replicated elsewhere in Europe’s troubled banking system are likely to re-acquaint themselves with the ‘insurance’ benefits of owning gold.

The US economy remained the only bright spot last week, as industrial production for the UK, Euro area and Japan contracted, adding support for the case for further monetary easing. With Parliament having approved Kuroda as the head of the BoJ, more aggressive policy from appears likely in Japan and could follow elsewhere if activity remains sluggish. In contrast, with China’s PBoC and the Reserve Bank of India becoming more “vigilant” on inflation, the divergence between advanced and developing world monetary policy could become more pronounced. [Gold Back Above $1,600 as ETF Selling Abates]

Emerging market central banks are taking no chances and actively diversifying FX reserves with gold as shown by the World Gold Council’s latest report. Net inflows into gold ETPs last week indicate that long-term investors are following suit.

After weeks of short-term investors leaving gold for more cyclical assets, long-term investors appear to be questioning the sustainability of the cyclical asset rally.

Uncertainty over the Eurozone will take center stage this week, after Cyprus announced that a levy on depositors would be a part of its bailout program. With industrial production in the UK, Euro area and Japan contracting last week, the case for additional monetary easing is gaining traction. Economic growth will likely remain stagnant in the absence of more central bank stimulus. With investors beginning to lose faith in the cyclical asset rally, defensive assets like gold are likely to be the beneficiaries. And as correlations remain high between silver and gold, silver should continue to follow in gold’s slipstream.

Last week, the Deputy Governor of the PBOC announced that China’s central bank is likely to cap gold holdings within its official reserves at 2%. While China has not announced any gold purchases in recent years, its gold holdings currently total 1.7% of its record US$3.3tn reserves. Even without Chinese official buying, central banks purchased 535 tonnes of gold in 2012, equivalent to 12% of world demand and the WGC expects a similar level of demand in 2013.

Given the strength in US jobs market recently, there will be heightened attention to the FOMC meeting this week. BoE minutes will reveal if the Governor who had voted for larger asset purchases last month has persuaded other of the benefit of more QE to help support the sluggish UK economy. Chinese PMIs will be closely watched after the weaker-than-expected February readings were clouded by the timing of the New Year. Meanwhile, the German IFO, ZEW and Euro area PMI surveys will be key indicators of the health of economic activity in Europe.

ETFS Physical Swiss Gold Shares (SGOL)

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