Gold got off to a good start this week. News coming out of Cyprus that bank depositors will be hit with a levy on deposits to help cover a bailout triggered massive flight to quality buying in gold, treasuries, and the U.S. Dollar. Stocks lost ground as well as fears over whether or not this is a one time event caused investors to flee risky assets.
This move by Cyprus could set a bad precedent and could increase pressure on the already fragile Euro zone banking system. One has to wonder, if it can happen in Cyprus what is to stop it from happening elsewhere? Especially in the more vulnerable Euro zone countries?
This is demonstrative of the fact that the markets in general have done a very good job of sweeping European sovereign debt issues under the rug for several months now. These types of problems are not created overnight however, and they certainly do not go away overnight either!
Cyprus is now reportedly set to vote on the measure on Tuesday and the outcome of that vote could have a dramatic impact on gold prices as well as outside markets. Should any additional negative headlines hit the wires out of Europe, faith in its banks may be shaken further and a bank run is not out of the question.
Perhaps the situation in the Euro zone is not as dire as it was 9-12 months ago, but a string of bad publicity could set things back quite a few steps. The next few days will be very telling along with the reaction following tomorrow’s vote.
The markets will also get a dose of the FOMC and Ben Bernanke this week. It is widely expected that the Fed chairman will once again reiterate the Fed’s plan to keep interest rates low for the time being (at least through 2013.)
Any unexpected discussion of the Fed pulling the punchbowl early could set the stage for a long awaited correction in equities and risk assets. On one hand this could be a gold positive as people look to buy perceived safety instruments, on the other it could be a gold negative as the notion of rising rates will likely boost the dollar.
On a positive note for gold bulls, this fear has triggered some panic buying along with some short-covering. This has driven prices above resistance at the$1600 level. Gold futures for April delivery printed a high of $1610.40 today. Looking at the daily charts. the short term moving averages are threatening to turn up. $1619ish looks to be the next near term target for gold prices.
Chart Source: QST
