BULLION MORNING - Gold breaks above $1,600/oz on safe-haven buying, short-covering rally likely

By: Kathleen Retourne

London 18/03/2013 - Gold broke above $1,600 on Monday morning when eurozone jitters bolstered the metal’s safe-haven qualities.

A weaker euro is adding further support - the single currency was last at 1.2965 against the dollar after eurozone ministers agreed a 10-billion-euro bailout for eurozone member Cyprus. The deal was reached after talks in Brussels between the ministers and the International Monetary Fund (IMF).

Spot gold was last at $1,604.25/1.605.2 per ounce, a $11.75 increase on Friday’s close and holding around three-week highs.

The metal had been repeatedly failed to breach $1,600 from Wednesday last week but the Cyprus deal over the weekend provided the impetus.

With much of that country’s debt rooted in its banks, this sector must bear a large part of the burden. Bank depositors have to pay up to 10 percent of their holdings in a 'one-off' levy as part of the deal.

“As people start to worry about the safety of their deposits, gold would become an attractive alternative and an escalation of these worries would prompt a return of fear-related physical buying,” UBS Investment Research said in a note.

“Gold should profit from the possibility that savings are no longer regarded as safe, and should thus enjoy strong demand in the current market environment,” Commerzbank also said.

Speculative positioning for gold rose 23.4 tonnes during the week ended March 12 but remains quite low in comparison to the 2011 highs. Traders said Comex non-commercial gold positions are at a two-week low, with long positions having held mostly stable around 200,000 lots since early December.    

“Gold net longs are just around 40 percent of the all-time high, and gross short positioning remains elevated at 12.3 million ounces. This increases the potential for a sharp short-covering rally should concerns over Cyprus, and more generally the eurozone, intensify,” UBS said.

In eurozone date, the Italian trade balance at -1.62 billion euros undershot the expected 2.11 billion euros and the EU trade balance at 9.0 billion euros was also softer than the forecast of 10.4 billion euros. The rest of the day is light on data, with participants likely to watch newsflow and currency movements for direction.

In wider markets, three-month copper was last around $7,600 per tonne, a four-month low, after stocks held in London Metal Exchange-bonded warehouses increased to 543,925 tonnes - the highest since March 4, 2010.

Among other precious metals, silver at $28.81/28.86 per ounce was up just one cent on Friday’s close while platinum was last at $1,573/1,582, a $12 loss.

Although palladium generally continues to outshine the rest the complex, it as last down $8 at $761/766 per ounce, although continued supply pressures in South Africa are providing support.

The latest Commodity Futures Trading Commission data for the week ended March 12 and ETF data for week ended March 15 showed a substantial 375,100 ounces added to palladium’s net speculative length.

(Additional reporting by Martin Hayes, editing by Mark Shaw)