The recent Cyprus deposit levy fiasco created a huge dent in confidence of the Euro-Zone banking system. Some reckoned that the levy is akin to asset seizure from the Government, and reacted extremely badly to the news. You would be too, if you knew that your retirement savings have just been slashed by 20% due to no fault of yours. Well, the alternative could be worse, with Cyprus banks facing liquidity issues, no bailout funds would equate to liquidation of the banks, and chances are depositors would end up getting cents to every single dollar they deposited in Cypriot banks. Liquidation and administration is a painful process, even if your deposits are considered tier 1 credit, it may take months if not years for whatever funds the liquidation event can raise, divided pro-rata and shared by all creditors. Hence, accepting a haircut to your savings is the best solution right? Right?
Tell that to those high-net worth depositors whose hair-cut may be upwards to 80%. Perhaps these people may rather prefer to see liquidation of the banks just so the rest of the depositors suffer with them.
What about depositors to other European banks, especially the high-net worth crowd? What would you do if you have 1 million cash sitting in a bank idly? Won’t you be scared that your funds may be seized one day? Well, they have done it once, they could do it again right? So what do you do then, withdraw a portion of your funds and convert to USD? No not good idea as QE is still ongoing. YEN? BOJ wants to weaken Yen further. How about gold then? Internationally recognized, traditionally an inflation protection asset. Perfect!
Since then Gold prices traded higher and never looked back as everybody busy themselves converting their cash into gold holdings. Story end, gold reached 2,000 USD per troy ounce and everybody is happy.
Except that didn’t happen.
4 Hourly Chart
It seems that the fear mongering scenario has been over-exaggerated. Yes, prices of Gold did push higher post Cyprus but price barely broke 20 USD above the 1,600 ceiling. Price quickly came down after assurances were given by various members of EU stating that Cyprus was a unique once-off case. This relief brought back prices down to test 1,600 last week. Early this week, price pushed up higher slightly due to the fall in USD strength following USD/JPY’s decline spilling over. However, price has failed to significantly test the overhead Kumo, and this resulted in a bearish backlash which punctured the 1,600 floor and catalyzed the largest decline in 5 weeks.
It is important to note that bad news were abound during the recent sell-off: Japanese Tankan data was lower than expected, Chinese Manufacturing PMI lower than expected, US ISM manufacturing lower than expected, Swiss PMI lower than expected, UK PMI lower than expected. Yes, German and French final PMI for March was 0.1 points improvement from the flash announcement, but both regions manufacturing sector are shrinking with readings below 50.0 and should not be construed as “good news”. It is clear that the decline in Gold is not fundamentally driven, but influenced more by speculative selling.
Why so much speculative selling though? Perhaps real “fear demand” of gold post Cyprus was never there. Furthermore, even if depositors were buying gold, it is unlikely that they would open trading accounts with banks and brokers to buy gold within such a short time. There has always been a disconnect between exchange traded gold prices versus physical gold that you can buy from your neighborhood physical gold seller. Hindsight is 20/20, but perhaps traders who believed in the gold hype post Cyprus should have seen that the gain in gold were pure speculative, rather than true demand driven.
Moving away from Cyprus and focusing purely on technicals, Gold is approaching interesting times ahead. 1,530 remains the level to beat for Gold bears. Current descending channel suggest that a test of the level may be possible sometime in the future, with Stochastic readings pointing lower. However, the possibility for price to break that 1,530 barrier remains up in the air. As more Fed members come out and suggest drawing the curtain on QE3 (such as Evans and Lacker last night), traders may believe that Gold demand will drop further due to lower inflation protection demand. However, it is important to note that Gold prices has yet to push new highs ever since QE3 has been announced. QE3 did not truly impacted gold prices, and hence the degree which Gold may drop on QE3 stopping is certainly debatable.