Precious metal slides below $1,500 an ounce for the first time since July 2011 – a 'make-or-break moment', analysts say
The price of gold fell to its lowest level in more than 18 months on Friday night amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by hard-pressed countries in the coming months.
At the end of a week dominated by the plight of the troubled Mediterranean island, gold slid below $1500 an ounce for the first time since July 2011 in anticipation that Cyprus would seek to raise €400m (£340m) by offloading a chunk of its reserves.
Share prices also fell on the major European bourses after the gathering of EU finance ministers in Dublin made it clear that there would be no increase to the €10bn earmarked for Cyprus – even though the expected cost of the bailout has been raised by €6bn to €23bn.
A Cyprus government spokesman said the increase would not lead to more money being taken from savers in the country's banks.
Although both Portugal and Ireland were granted an additional seven years to pay back their loans as a reward for sticking to their austerity programmes, help for Cyprus will be limited to extra investment from Europe's structural fund.
A spokesman for the German government said the contribution to Cyprus's bailout would not change despite the deteriorating financial health of the country, but Angela Merkel's government supported easier terms for Portugal – which tabled fresh measures to save more than €1bn from its budget – and Ireland.
Portugal's prime minister, Pedro Passos Coelho, said tentative cuts had been outlined. "We have already presented to our partners some possibilities that will require further work next week when the Troika visits Portugal," he said. "We have a [bailout] agreement with our partners and we need to stick to it."
Most major European stock markets saw falls of more than 1%, with weak economic news from the US adding to the downward pressure on gold.
While Cyprus's 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 SK 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."
David Owen, chief European economist at investment bank Jefferies, said: "As with Greece, we should not be under any illusion that we have seen the last of the Troika warning about Cyprus's debt dynamics. The draft EC report [that suggested another €6bn from Cyprus] saw as a worst case scenario Cypriot GDP falling by around 15% in the next two years before output stabilises. However, Greek GDP has now fallen for three years since its bailout, to date by around 20%, with forward looking indicators still pointing down."
Figures released on Friday showed that European industrial production rose by 0.4% in February, but analysts said the outlook remained bleak.
David Brown, of New View Economics said: "Annual growth remains in deep negative territory pulled down by severe recession forces sweeping through the eurozone. ECB hopes that the eurozone economy will pick up later this year are simply wishful thinking while a large part of the eurozone economy is suffering such serious austerity and economic sentiment remains so vulnerable."
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