Gold reverses losses ahead of Cyprus vote

 Gold reversed earlier losses on Tuesday, hitting a 2-1/2 week high above $1,610 on renewed flight-to-safety investment ahead of an imminent vote in the Cypriot parliament on a bailout plan.

Cyprus’s parliament was set to reject an unpopular tax on bank deposits in Tuesday’s vote, a government spokesman said, a move that would push the island closer to a default and banking collapse.

Reuters report showed that spot gold rose to its highest since Feb 27 at $1,613.86 an ounce earlier and was last seen at $1,612.87, still up 0.5 percent by 1558 GMT. U.S. gold futures for April delivery rose $4.40 an ounce to $1,609. In euro terms , gold peaked to its highest since February 07 at 1,251.33.

The euro zone proposal, unveiled at the weekend, to partially fund a bailout of the island by taxing bank deposits rattled financial markets and pushed gold higher as risk averse investors chose it as a haven. The metal had struggled to retain those gains and started the day on the back foot, falling to a session low of $1,599.54, as cautiousness prevailed on concerns over the plan.

“I think (holders of) short (positions) got nervous and started to cover their positions,” Deutsche Bank precious metals trader Michael Blumenroth said.

“Some flight to safety was already seen yesterday but there was no conviction and gold failed to hold onto its gains and now people are again getting nervous and that’s pushing the market higher.” In wider markets, the euro edged back towards the previous session’s three-month low versus the dollar, while European and U.S. stocks mostly steadied above earlier lows as investors used the two-day decline as an opportunity to pick up beaten down shares.

While gold tends to benefit from rising risk aversion if investors choose the metal as a safe store of value, it has also moved closely in line with stocks and the euro this year.

Investment interest in gold remained muted. Selling from gold-backed exchange-traded funds continued on Monday, with the largest, New York’s SPDR Gold, reporting its biggest outflow in nearly a month, of 13.5 tonnes. That brought its total outflow this year to 131 tonnes. Traders are also looking ahead to the latest policy meeting of the Federal Open Market Committee, which begins on Tuesday. Speculation that the Fed could withdraw from its monetary easing policy sooner than expected has pressured gold this year. “(We) expect the FOMC to reaffirm its commitment to the current quantitative easing policy and to offer no hint that it will alter the policy in the near term,” HSBC said in a note.