Picture: THINKSTOCK
Picture: THINKSTOCK

THERE is a good chance the gold price will rebound from oversold levels after investors took fright from developments in Cyprus, but it would take sustained US economic weakness to restart the bull market in the metal, UBS said on Wednesday.

The gold price had one of its largest historic falls last Monday when it dropped by $200. Gold fell to $1,355.50/oz, an intraday fall of 9.7%, the steepest fall since a 9.6% drop in February 1983.

Gold reached a record $1,921/oz in September 2011, the high-water mark in a 12-year bull run.

One reason for the fall was the market misunderstanding a report on the bail-out of the Cyprus economy and potential central bank gold sales there, which investors feared could mark the start of broader European central bank gold sales, said UBS global commodity and mining analyst Julien Garran.

This was a highly unlikely development, he said, citing central banks striving for credibility with the size and quality of their reserves. Under European Union rules, governments cannot force or prompt central banks to sell gold, Mr Garran said.

While the Cyprus central bank may sell off part of its 13.5 tons of gold, it was likely to do so in an off-market transaction to another central bank with no net effect on the gold market, he said.

"We are exceptionally sceptical that this indicates that there would be further central bank selling from the rest of Europe. The key issue is central bank credibility and there’s no way they’d want to impinge on that," Mr Garran said. "We think that sell-off was substantially overdone on that basis, and consequently there is further upside in the gold price in the short term."

A bigger factor in determining the direction of the gold price was what the US Federal Reserve was planning to do with its quantitative easing (QE) programme, and the health of the US economy.

"For us, gold is and always has been an almost perfect barometer whether the US will be reflating the global economy or deflating it."

While there could be a kick-up in the gold price, recouping some of its losses, sentiment towards gold is likely to remain cool.

"Yes, we can bounce further from the oversold levels of last Monday because of the misapprehension of the Cyprus gold sales, but in order to get a proper bull market in gold what you need is a serial disappointment in US data that persists for some time," Mr Garran said.

The US and global emerging markets are likely to strengthen over the next few months, he said.

This strengthening could cause bond yields and oil prices to rise.

"If they rise sufficiently so they start to squeeze the US consumer, that could cause at some point later in the year a more persistent weakness in US growth, which could stay the hand of the Fed and cause investors to start thinking that QE would have to be larger and last for longer," he said. "That for us would be the point where you could see a sustained outperformance for gold relative to other assets."

Gold in exchange-traded funds and products plunged by $20bn this month and was heading for the biggest monthly drop.