March 22, 2013 7:55 pm

Gold breaks through $1,600 level

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Gold Bars©Reuters

Gold prices rose above $1,600 a troy ounce as worries about the Cyprus banking bailout reignited gold’s haven appeal and the yellow metal posted its biggest weekly gain in two months.

After breaking through the technically important level on Monday, the yellow metal on Thursday hit the week’s high of $1,616.36 a troy ounce.

Although prospects of a last-minute deal and a firmer dollar later pared gains, gold closed the week up 1 per cent and analysts expect the metal to remain above $1,600.

“Concerns about the broader implications [of the Cyprus situation] have scope to reignite gold’s safe haven appeal further,” said Barclays in London.

Apart from haven buying, the eurozone situation triggered a “short-covering” rally, where hedge funds and other financial investors who had previously placed bearish bets on the US futures markets rushed to cover their positions.

Gold’s advance later faltered as it approached $1,620 a troy ounce, the level where the yellow metal met strong selling three weeks ago.

Physical purchases from Asia fell away above the $1,600 level, said analysts.

Joni Teves, a precious metals analyst at UBS in London, said Chinese buying remained light while Indian demand had “generally been unimpressive this month”.

In Europe, it was still early to see a pick-up in the “fear trade”, where investors looked for haven assets, but “this should start trickling in as Cyprus continues to dominate the headlines”, she added.

Although gold has rebounded from the February low of $1,554.49 a troy ounce, analysts said the metal’s further recovery hinged on the return of buying in exchange traded funds.

Since the start of the year, selling by physical gold-backed ETFs has totalled 140 tonnes by mid-March, which is already equal to almost half of all the gold ETFs bought last year, according to Barclays.

ETFs have become a major presence in the physical gold markets and the leading sources of demand last year.

The two other sources of gold demand – global gold jewellery consumption and central bank purchases – weakened in 2012 and growth in ETF buying had been “crucial in supporting prices”, according to the bank.

While gold jewellery demand was expected to post only a modest rebound and central bank buying is expected to fall, selling by ETFs “has slowed in the past few weeks and the Cyprus bail-in is likely to serve as a sharp reminder of the benefits of holding gold in the current environment”, said Barclays.

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