Cyprus brings gold price 'immunity' as ETF outflows hit 18 tonnes a day

The gold price on Tuesday was consolidating yesterday's gains as investors continued to digest the stunning decision over the weekend to bail-in Cypriot savers.

By early afternoon gold was hanging onto gains at $1,610 as news that the island nation's parliament rejected a €17 billion bailout deal with the EU broke.

No-one voted in favour of the bank deposit levy, but politicians of the country of fewer than 1 million people will now have to frantically look for alternatives or face bankruptcy.

The deal which included a 10% haircut for deposit holders angered ordinary Cypriot bank customers and more than a few Russian oligarchs, who prefer the tax haven above Moscow bank accounts in rouble.

While the proposed deal is small by comparison to other bailouts and the Cyprus economy constitutes less than 0.5% of the bloc's GDP, it has re-ignited fears that the debt crisis on the continent which has been raging for more than two years could lead to a run on banks.

In addition, it shows Germany as the de facto lender of last resort in the EU is beginning to take a much harder line with struggling states in the south.

It has also showed that while the problems in Europe seemed to receded into the background recently, the continent's deep structural problems are far from being solved.

All of this has benefited gold, which attracts investors looking for an asset that functions as a storer of value and a safe haven in times of uncertainty.

What's more, gold's resilience comes amid unprecedented outflows from exchange traded funds backed by physical gold.

A research note from Germany's Commerzbank on Tuesday says the events in Cyprus has benefited the precious metal in such a way that it "appears to be immune to the latest outflows from the ETFs":

The gold ETFs tracked by Bloomberg recorded outflows of more than 18 tons yesterday, their highest daily outflow since the end of February.

Since the start of the year, outflows have thus totalled over 180 tons.

This means that in the first 2½ months of this year alone the gold ETFs have seen outflows of nearly two thirds of the holdings which, according to the WGC’s data, were built up in the whole of last year.

Evidently the ETF outflows are being offset by strong physical demand elsewhere.

In our opinion, the gold price should continue to gain ground.

Since the first fund was launched in Australia a decade ago, retail buying of gold ETFs has been a massive boon for the gold price, helping to maintain the metal's unbroken 12 years of gains.

Sometimes called 'the people's central bank', gold holdings in ETFs are still only topped by that of the US Federal Reserve and the Bundesbank.

Hat tip: Sharps Pixley

March 2011 image of carnival parade in Limassol, Cyprus by ruzanna / shutterstock