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Gold's Longer Run Positive Factors - Where Art Thou?

London, 12 April 2013

Based on the European Commission's draft, Cyprus will sell about 10.4 tonnes of gold, representing 4 percent of the Euro 10 billion bail-out package for Cyprus and about 2.6 percent of the maximum 400 tonnes annual gold sales by the European central banks. Gold reserves represent 62% of total reserves in Cyprus.

However, Barclays pointed out that other European central banks hold a much higher percentage of gold - 90.3% in Portugal, 82.2% in Greece, 72.2% in Italy and 69.2% in France. The potential sale of Cyprus' gold triggers fear that other European central banks will sell their gold to meet their financing needs. So far, the European central banks have sold only 4 tonnes in the current fiscal year, leaving a lot of room for further sales. Judging from the pace of addition of gold by the other central banks such as China, Russia and Korea, Barclays expects that the net central bank gold buying will be at least 300 tonnes in 2013 and 2014. Central bank demand will again offset any slowdown in the jewellery demand.

The U.S. Comex gold futures plunged 1.76 percent on Wednesday as Cyprus may sell the state's excess amount of gold to finance its debt while several FOMC members wanted to lower the amount of bond purchases around mid-year and end the QE3 by the end of 2013. On Thursday, gold prices recovered 0.39 percent when the government of Cyprus denied the selling of 400 million Euros of gold, saying this was one of the several options to sustain debt. The S&P 500 index surged past its previous high in October 2007 and went up 2.58 percent this week to 1,593.37. The Euro Stoxx 50 index also surged 3.44 percent this week. The Dollar index fell 0.30 percent to end at 82.247 on Thursday.

Other News Swinging the Gold Prices

On Thursday, the U.S. initial weekly jobless claims ending 6 April were lower than expected at 346,000 compared to 360,000 surveyed. Traders tend to sell gold when labour market data improve. On the same day, Hong Kong reported that gold exports to China surged 89% during February while the net exports of gold into China were 61 tons, an increase of 27 tons compared to January. Bears of gold are battling with the bulls, with the bears excited by the shorter-term factors such as the U.S. economic improvement, and the bulls encouraged by the longer-term hedging demand by the global central banks.

What to Watch Next Week

While the market will focus on the U.S. Fed Bernanke's speech on 12 April, we will also monitor China's March industrial production and the U.S. March housing starts on 15 April and the IMF/World Bank meeting from the 19 to 21 April for any changes in their global growth assessment. Bloomberg reported that the IMF has just cut its 2013 U.S. GDP growth forecast from 2 percent to 1.7 percent due to the automatic budget cuts.

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