Gold has lost momentum since its strong bounce in January, mostly trading a rather sedate $1710-$1750 range for the past two weeks. After increasing their longs by more than 7 million ounces (moz) since January's multi-year lows, Comex speculators last week scaled back their gold exposure for the first time in six weeks.
Gold investors seemed to be well aware of the fact that the prices of yellow metal could be volatile until the final decision is made by eurozone officials, who have the tendency to drag the talks till the very last minute. As a result, many investors preferred to wait until the Greek bailout reached its final stage.
UBS said that the bulk of market participants have resorted to either playing the range or staying on the sidelines. For some intraday range trading has been the strategy of choice, which has perhaps entrenched the sideways tendency.
"Gold needs a catalyst if it is to move out of its recent range - and we have felt that investors are unlikely to look at gold with interest at least until the current stage of the Greek crisis is resolved," UBS strategist Edel Tully wrote in a note to clients.
The 130-billion-euro greek bailout came at the right time and pushed gold prices to a high of $1757. Euro zone ministers on Tuesday agreed to a 130 billion euro ($172 billion) bailout for Greece, the country's second rescue aid in about 2 years. In May 2010, Eurozone and the IMF granted 45 billion euros to Greece, with more funds to follow, totaling 110 billion euros.
"With gold trading side by side with EUR/USD of late, Eurozone events are the most likely to enable gold to break out of its range. That EUR/USD has started the week trading near its 2012 highs suggests that optimism on a resolution being reached is already being priced in," Tully said.
In the near term, XAU/EUR may hold up better than XAU/USD in the event of a euro pullback once the dust has settled in Europe this week.
However, the conclusion of negotiations on Greek debt restructuring and a new bailout programme is not the only potential catalyst for gold. The outcome of the ECB's Feb. 29 LTRO could also lend impetus, as could an extension of the price of crude oil. Long Term Refinancing Operation, or LTRO, is a major financing method used by the ECB to provide liquidity to its member banks.
The amount of bank take-up in next week's LTRO has been the subject of much discussion among market participants. UBS Economics conducted a survey on the likely size of next week's LTRO, the average result of which was 668 billion euros, and the median 629 billion euros, based on 317 responses.
Gold could benefit from this development as the yellow metal typically benefits from infusions of liquidity and would also boost euro.
Gold also seems to have benefitted somewhat from the recent oil price appreciation and geopolitical risk premium as tensions around Iran's nuclear programme intensify once again.