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But a firm dollar and general perception of an economic recovery quickly snuffed out the rally, sending gold below the key resistance level of US$1 600.
The eurozone agreed on Saturday to hand Cyprus a bailout worth €10 billion but forced the country’s depositors to pay up to 10 percent on their savings, triggering fear that it could set off bank runs in other countries.
This came after the eurozone had enjoyed a few months of relative calm, investors had grown more confident in the economic recovery and banks had started paying back the crisis loans handed out by the European Central Bank.
“The Cyprus crisis is bearish euro and bullish dollar, which is mathematically negative for gold,” said Jeremy Friesen, commodity strategist at Société Générale in Hong Kong.
“But it does raise the question how the ECB is going to continue to allow tightening of credit, which has been happening as a result of LTRO repayment.”
The ECB pumped more than €1 trillion into money markets in two long-term refinancing operations (LTROs), in December 2011 and February 2012, to provide liquidity for banks. Friesen said if the ECB could turn on the tap again and help its economy by pumping more cash into the system, that would help gold, which thrives on ultra-loose monetary policies.
Spot gold rose to a two-and-a-half-week high of US$1 608,30 an ounce earlier in the day, before easing to US$1 597,76 by 6.50am GMT, up 0,4 percent from the previous close.
US gold also hit a two-and-a-half-week high, at US$1 607,60 an ounce, before paring gains to trade at US$1 596,60.
Technical analysis suggested spot gold faced resistance at US$1 611 an ounce and may retrace to US$1 586, Reuters market analyst Wang Tao said.
Physical buying in Asia slowed as prices climbed, dealers in Singapore and Hong Kong said.
“People are waiting for price dip to buy in, while scrap flow is very limited,” said Dick Poon, GM at Heraeus Metals Hong Kong.
Investors will closely watch a US Federal Reserve policy meeting today and Wednesday to assess the central bank’s attitude towards aggressive monetary stimulus. Economists expected the Fed to keep buying bonds for the rest of the year to aid the still frail economic recovery.
Interest in gold exchange-traded funds (ETFs) remained lukewarm on Friday. Holdings of SPDR Gold Trust, the world’s biggest gold ETF, resumed a decline after a two-day pause, falling 3,311 tonnes to 1 232 996 tonnes, the lowest level since October 2011.
Speculators raised net long positions in US gold in the week to March 12 from a more than five-year low of 39 631 contracts to 43 195 contracts, but also increased short bets on gold, data from US Commodity Futures Trading Commission showed.
“There is a chance that gold was oversold and reflected too hawkish a view on policy and too optimistic a few on growth in the near term,” Friesen said. – Reuters.
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