Gold Extends Gains as Safety Investment Amid Cyprus Vote

The ‘Sneaky Bid’ in Gold and Silver
Anthony Bradshaw | Getty Images

Gold reversed earlier losses on Tuesday, hitting a 2-1/2 week high above $1,615 an ounce on renewed flight-to-safety investment before an anticipated vote by the Cyprus parliament on a bailout plan.

The parliament was set on Tuesday to reject an unpopular tax on bank deposits, a government spokesman said, a move that would push the island closer to a default and banking collapse.

(Read More: Cyprus Bank Tax Lit 'Two Sticks of Dynamite': El-Erian)

Spot gold reached its highest since Feb. 26 at $1,615.16 an ounce and was last seen at $1,612 per ounce, still up 0.5 percent. U.S. gold futures settled up $6.70 an ounce at $1,611.30. In euro terms, gold peaked at its highest since February 07 at 1,256.50.

(Read More: Cyprus Heads for Cliffhanger Parliamentary Vote on Deposits Tax)

The euro zone proposal, unveiled at the weekend, to partially fund a bailout of the island by taxing bank deposits rattled financial markets and pushed gold higher as risk averse investors chose it as a haven.

The metal had struggled to retain those gains and started the day by falling to a session low of $1,599.54, as cautiousness prevailed on concerns over the plan.

Deutsche Bank precious metals trader Michael Blumenroth said holders of short positions ``got nervous and started to cover their positions."

In wider markets, the euro edged back towards the previous session's three-month low versus the dollar, while European and U.S. stocks mostly steadied above earlier lows as investors used the two-day decline as an opportunity to pick up beaten down shares.

While gold tends to benefit from rising risk aversion if investors choose the metal as a safe store of value, it has also moved closely in line with stocks and the euro this year.

Investment Interest Muted

Investment interest in gold remained muted. Selling from gold-backed exchange-traded funds continued on Monday, with the largest, New York's SPDR Gold Trust, reporting its biggest outflow in nearly a month, of 13.5 tons. That brought its total outflow this year to 131 tons.

Traders are also looking ahead to the latest policy meeting of the Federal Open Market Committee, which begins on Tuesday.

Speculation that the Fed could withdraw from its monetary easing policy known as quantitative easing, or QE, sooner than expected has pressured gold this year.

HSBC said in a note that it expects the FOMC to reaffirm its commitment to the policy "and to offer no hint that it will

alter the policy in the near term.'' It added that the FOMC "may decide to update its strategy principles of how to 'exit' from QE at the coming meeting.

"Uncertainties surrounding the potential withdraw of QE contributed to gold's sell-off earlier this year. Given this, clarity on the FOMC's QE exit strategy may help ease such concerns and lend support to gold."

Silver also reversed earlier losses, rising 0.1 percent to nearly $29 an ounce. Meanwhile, platinum was last down 1.4 percent at $1,554 an ounce and palladium was last down 3.8 percent at $733 an ounce.

Gold extended its historically unusual premium over platinum to its highest since Jan 11 at nearly $50, as concerns over Cyprus pressured industrial commodities while lifting gold.

Platinum, chiefly used in autocatalysts, has traded at a discount to gold for much of the last year, but reversed that trend in the first quarter on growing optimism that steadier global growth would translate into a demand recovery.

However, carmakers still struggled, especially in Europe, a key market for platinum-heavy diesel catalysts. Europe's car market shrank 10.2 percent in February, with sales of new vehicles falling to 829,359, according to figures from the Association of European Car Manufacturers.