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South Cyprus devalues gold prices

13 April 2013

For the first time in 12 years, the gold price is now officially in decline, Yahoo News reports.

“The scale of the decline has been absolutely breathtaking. We tried to rally and that just didn’t get anywhere … there hasn’t been any downside support, it’s like a knife through butter,” Societe Generale analyst Robin Bhar said

Gold fell below $1,500 an ounce on Friday, a drop of more than 20% from its record 2011 highs, putting it in bear market territory for the first time since 2001.

The metal was heading for a 4.9% decline this week, its third such drop in a row and the biggest since December 2011. It was down some 22% below the record peak hit in September 2011 at $1,920.30.

What’s driving the fall?

An unexpected contraction in US retail sales, which hurt stocks and supported the dollar on Friday, added to pressures building in the course of the week from several factors, including a draft plan for Cyprus to sell bullion and outflows from exchange-traded gold funds.

A European Commission assessment of what Cyprus needs to do as part of its European Union/International Monetary Fund bailout earlier this week showed it was set to sell gold reserves to raise around €400 million.

While Cyprus’ gold sale in itself is small, heavily indebted eurozone nations such as Italy and Portugal could also find themselves under increasing pressure to put their bullion reserves to work.

“If Cyprus can break the gold market, then (there are) many reasons to be worried, with Slovenia, Hungary, Portugal, Spain and Italy in line,” Milko Markov, an investment analyst at S.K. Hart Management, said.

“It is a make-or-break moment for gold … if the market can’t handle the reallocation and Cyprus, then there is really a need for a bear market*.”

*Bear market: where numerous sellers force the price of a commodity downwards

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