Speculation that Cyprus was readying the sale of its excess gold reserves put the gold price under early downward pressure last week, with investors concerned that other countries could follow Cyprus’s lead to reduce debt burdens.

While downward momentum gathered pace as technical levels were breached late in the week, such a debt reduction approach seems unrealistic given the small value of sovereign gold holdings relative to debt, even for large holders like Italy. Reports of gold price downgrades by some market analysts added to the bearish tone for precious metals and despite Cypriot authorities’ denial of the gold sales rumors, the possibility of such a precedent made investors wary.

Downside surprises from both US retail sales and consumer confidence helped partly reverse the speculation of an early exit from quantitative easing that some reading the FOMC minutes released earlier in the week were led to believe. Weaker-than-expected Chinese GDP and industrial production data released earlier today are likely to see commodity prices including gold remain subdued as investors revise their expectations for Chinese consumption. [Gold ETFs Plunge]

However, with early signs of deterioration in US economic activity appearing and ongoing Eurozone weakness likely to keep central banks firmly in aggressive stimulus mode, the declines in precious metals prices seem exaggerated.

COMEX gold inventory shrinks as speculative net longs falls. Over the past two months COMEX gold inventory has fallen 15%. This in part reflects a reduced scale of speculative activity which has limited the need for counterparties to post collateral that make up the gold inventory.

Key events to watch this week.  Policymaker deliberations will dominate market attention this week, with the G20 Finance Ministers and Central Bank Governors’ Meeting ahead of the US Congressional deadline to raise the debt limit on Thursday. Although the US government’s ability to borrow new money was extended until mid-May, with the inability of US politicians to avoid the sequester fresh in investors’ minds discussions will be closely watched. On the economic front, US housing statistics and industrial production will be monitored closely for any sign of a slowdown in growth and the possibility of continued stimulus from the Fed.

ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)