Gold market report: the Cyprus reaction

Whichever way you look at it, the clumsy attempt to tax depositors and to paint Cyprus as a money-laundering centre for Russian proceeds of crime and tax evasion has backfired. For those interested in precious metals it will be interesting to see to what extent eurozone residents get the message that it is not a good idea to have all their money in a rickety banking system, and also to see what the reaction is from all those Russian billions not actually trapped in Cypriot bank deposits.

This crisis comes at a time of physical bullion scarcity, which is an unwelcome difficulty for the bullion banks managing short positions. So far, they have managed to keep a lid on prices with a degree of success, allowing the gold price to rise by less than 2% in the last week, when it could have been much more.

Looking at daily open interest in conjunction with price moves, it looks like the hedge funds have been allowed to close their shorts without any attempt from the bullion banks to squeeze them. This is wise, because a bear squeeze during Cyprus’s banking shutdown could have easily escalated into a buying panic, taking the gold price sharply higher and leaving the bullion banks nursing substantial losses. However, the largish jump in open interest last night (7,218 contracts) on a small fall in the price suggests new buyers are accumulating positions at these levels.

Silver has been sidelined, partly because it is in gold’s shadow, and partly because worried Europeans have to pay VAT on silver bullion purchases (unless they buy through GoldMoney, when VAT doesn’t apply). The bullion banks have been content to avoid unnecessary volatility, though they have managed to reduce their short positions from recent extremes. The underlying dynamics for silver are positive, with continued hoarding of the physical metal leaving the paper market overly dependent on forward sales from producers and refiners.

The Week To Come

Doubtless the optimists hope that the Cypriot banks will reopen on Tuesday, the ECB will guarantee stability and we can consign this unpleasant episode to history. More risk-averse operators will think it a miracle if any Cypriot banks open at all. Indeed it does appear that the crisis might be in its early, rather than terminal stages.

Ahead of the Easter break, there are not many announcements of interest. Such as they are, they include the following.

Monday: UK Nationwide House Prices
Tuesday: US durable goods orders; S&P Case-Shiller Home Prices; Consumer Confidence Index; New Home Sales
Wednesday: UK current account deficit and third GDP estimate; eurozone Business Climate Index; Consumer Sentiment; Economic Sentiment; and HICP. Deadline for enactment of US spending bill
Thursday: eurozone M3 money supply; US Initial Claims; Chicago PMI
Friday: US Core PCE Price Index; Personal Income; Personal Spending