Gold price jumps on Cyprus worries

Gold saw its biggest rise in a month, gaining more than 1% on Tuesday. Shares fell as markets reacted to news over the weekend that Cyprus would confiscate up to 10% of its citizens' bank balances as part of a EU bailout. This decision by Cyprus highlights the value of gold as a store of value.

By Richard Evans
11:15AM GMT 18 Mar 2013
The Telegraph

Gold, a traditional safe-haven asset in times of economic uncertainty, saw its biggest rise in a month, gaining more than 1pc to $1,604 an ounce.

In euro terms gold rose even more, by 1.7pc from €1,218 at Friday's close to €1,237 in late morning trading, according to GoldCore, the bullion dealer.

Shares, by contrast, fell on Monday morning as the markets reacted to news over the weekend that Cyprus would confiscate up to 10pc of its citizens' bank balances as part of an EU bail-out. The FTSE 100 index fell by more than 1.5pc.

Angelos Damaskos, who runs the Junior Gold fund, said: "The decision by Cyprus to impose a charge on all bank deposits is a fresh reminder of the huge risks in the eurozone periphery. It could undermine confidence in the banking system and cause further instability that will be difficult to contain.

"It highlights the value of gold as a store of value immune from currency devaluation and a hedge against economic instability."

Kleinwort Benson, the private bank, said: "Events such as these remind investors about the value of safe-haven investments such as gold, which provides a buffer to the vagaries of international geopolitics and downside market events.

"We continue to be negative on eurozone financial stocks and European peripheral debt. As uncertainties connected to the financial crisis are still potent, we continue to hold safe-haven assets such as gold, the US dollar and the Japanese yen – all of which allow for crucial diversification, especially in times of crisis."

The levy on bank deposits was scheduled to come into force on Tuesday after a bank holiday in Cyprus on Monday. The emergency levy was originally set at 9.9pc for deposits of more than €100,000 and 6.75pc for lower sums, although there have been calls to lessen the blow for smaller savers. Depositors will receive bank shares as compensation.

Ros Altmann, the economist, said: "Cyprus may be tiny but it could bring down the EU banking system. Bust banks cannot be saved by robbing savers – small depositors must be sacrosanct. This is another example of short-term thinking that misses the longer-term dangers."

She added: "Have EU policymakers taken leave of their senses? For them to insist that Cyprus confiscate small savers' bank deposits in order to save its banks makes a mockery of depositor protection schemes everywhere and runs the risk of bank runs across Europe.

"Trust is the cornerstone of banking. It is essential that those putting their money into banks believe their funds will be safe. The whole point of depositor protection is to reassure ordinary people that they can trust the system and know that their money is going to be protected at least up to the promised level. As soon as that trust is lost and depositors want their money back, the banks will no longer be able to function."

Kleinwort Benson added: "Many depositors in eurozone banks will be questioning what they should do about their deposits. The obvious choice would be to move deposits to 'safer' banking systems, such as in the UK. Other possibilities would be to increase cash holdings in currencies where the risk of such action is lower, such as the US dollar."

Other assets to gain from the renewed uncertainty in the eurozone were the government bonds of countries seen as safe relative to the "periphery". Germany and France saw their borrowing cost fall, as did Britain – which could dampen hopes that annuity rates will continue their recovery. The price of oil also fell in response to the Cyprus bail-out.

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