Gold rose above $1,600 for the first time in more than two weeks on Monday as a radical bailout package for Cyprus threatened to trigger fresh turmoil in the euro zone, driving investors to seek safety in gold.
"The Cyprus crisis is bearish euro and bullish dollar, which is mathematically negative for gold," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong. "But it does raise the question how the ECB is going to continue to allow tightening of credit, which has been happening as a result of LTRO repayment."
The ECB pumped over a trillion euros into money markets in two long-term refinancing loans (LTROs), in December 2011 and February 2012, to provide liquidity for banks. Spot gold rose to a 2-1/2-week high of $1,608.30 an ounce earlier in the day, before easing to $1,597.76 by 0650 GMT, up 0.4 percent from the previous close.
US gold also hit a 2-1/2-week high, at $1,607.6 an ounce, before paring gains to trade at $1,596.60. Technical analysis suggested that spot gold faces resistance at $1,611 an ounce and may retrace to $1,586, Reuters market analyst Wang Tao said. Physical buying in Asia slowed as prices climbed, dealers in Singapore and Hong Kong said.
"People are waiting for price dip to buy in, while scrap flow is very limited," said Dick Poon, general manager at Heraeus Metals Hong Kong Limited. Investors will closely watch a US Federal Reserve policy meeting on Tuesday and Wednesday to assess the central bank's attitude towards aggressive monetary stimulus. Economists expected the Fed to keep buying bonds for the rest of the year to aid the still frail economic recovery. Speculators raised net long positions in US gold in the week to March 12 from a more than five-year low of 39,631 contracts to 43,195 contracts, but also increased short bets on gold, data from US Commodity Futures Trading Commission showed.