News over the weekend that Cypriot bank depositors could face levies totaling EUR5.8Bbn as part of the bank bailout agreement rattled investors and led to a sharp rally in defensive assets.

Investors’ fear that such policy could be replicated elsewhere in Europe’s troubled banking system are likely to re-acquaint themselves with the ‘insurance’ benefits of owning gold.

The US economy remained the only bright spot last week, as industrial production for the UK, Euro area and Japan contracted, adding support for the case for further monetary easing. With Parliament having approved Kuroda as the head of the BoJ, more aggressive policy from appears likely in Japan and could follow elsewhere if activity remains sluggish. In contrast, with China’s PBoC and the Reserve Bank of India becoming more “vigilant” on inflation, the divergence between advanced and developing world monetary policy could become more pronounced. [Gold Back Above $1,600 as ETF Selling Abates]

Emerging market central banks are taking no chances and actively diversifying FX reserves with gold as shown by the World Gold Council’s latest report. Net inflows into gold ETPs last week indicate that long-term investors are following suit.

After weeks of short-term investors leaving gold for more cyclical assets, long-term investors appear to be questioning the sustainability of the cyclical asset rally.

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