Gold holds near 3-week high on Cyprus crisis

Cyprus's rejection of bailout terms saw investors seek safe haven demand in gold

Gold held steady on Wednesday, close to a three-week high as Cyprus's rejection of bailout terms triggered worries about a default and underpinned safe haven demand in gold.

But buying in Asia's physical markets slowed from earlier in the month as prices rose over the last week.

Cyprus's parliament overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout on Tuesday, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray. The threat of a default or even expulsion of Cyprus from the euro zone drove nervous investors to seek refuge in gold, though such support may not last long.

"Given the relatively small sum involved compared to the previous debt financing schemes that were put together for the Greeks and others, Cyprus is a manageable problem and one that we think will eventually get resolved," said Ed Meir, an analyst at INTL FCStone, in a research note.

Supportive of gold prices, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 2.708 tonnes to 1,222.162 tonnes on Tuesday, the first increase in daily holdings since early February.

Spot gold traded flat at $1,611.46 an ounce by 0255 GMT, near a three-week high of $1,615.16 hit on Tuesday.

US gold was also little changed at $1,610.90.

Technical analysis was bullish. Spot gold could rise to $1,626 as it has cleared a resistance at $1,611, said Reuters market analyst Wang Tao.

Asia's physical gold buyers have, meanwhile, shied away from higher prices, awaiting a return to lower levels when the situation in Cyprus calms down.

"Gold buying from China is slower from a few weeks ago, and people are selling in Shanghai to take profit," said Peter Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.

"The upside is still limited. After people calm down, they will still invest in other assets."

Upbeat US economic data in recent months has encouraged investors to pile money into the stock market, helping the S&P 500 index climb more than 8 percent so far this year.

Gold, in comparison, is down nearly 4 percent since Dec. 31.

Investors will be closely watching the outcome of the Federal Reserve's two-day meeting on Wednesday, as well as a press conference by Fed Chairman Ben Bernanke. Any hint of tightening monetary policy would add to headwind that gold faces.

Europe's car sales in February shrank 10.2 percent on the year to their lowest in at least 23 years, suffering from austerity measures in debt-stricken euro zone nations, weighing on platinum and palladium, which are widely used in producing autocatalysts to clean up exhaust.

Spot platinum inched up 0.2 percent to $1,556.99, off a more than two-month low of $1,545.25. Spot palladium traded nearly flat at $733.22, after tumbling 3.9 percent in the previous session, the sharpest one-day decline in nearly five months.

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