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Is the Cyprus crisis a golden opportunity?

Fears of a banking collapse have put the investment spotlight back on gold as a solid defensive move

The economic crisis in Cyprus has lurched on all week, culminating yesterday with the European Central Bank giving the island until Monday to find €5.8bn (£4.9bn).

If a solution is not found and the ECB sticks to its threat, the next step would probably be a banking collapse on Cyprus. The net effect of that would lead to damaging economic repercussions across the eurozone.

The financial problems engulfing Europe have been hitting the headlines for months, but the latest woes – which included the Cypriot government threatening to raid people’s bank accounts to raise emergency cash – have thrust rumours of a eurozone banking collapse back into the realms of possibility.

If that disaster did happen, it could wipe out billions on share prices, leaving millions of people with severely shrunken nest eggs. It’s against that background that some investors are taking another look at gold.

While the price of gold fluctuates like shares and other assets, experts point out that the commodity will always have a value and be tradeable.

“The message all around the eurozone is don’t trust the banks to look after your money,” says Alasdair Macleod, head of research at GoldMoney, a firm which buys precious metals on behalf of clients. “This is bound to lead to a desire to move money out of the banking system altogether and it is no coincidence that both gold and silver prices are currently firming up.”

The biggest drivers of the current bull run in gold are investors in China and India, where the demand for the  precious metal is soaring. In fact the World Gold Council reports that in 2012, the two largest jewellery-consuming markets, India and China, together generated more than half – 56 per cent – of the total annual jewellery demand across the world.

The independent financial adviser Alan Steel has, in the past, criticised those who have predicted an eternal bull run for gold. Now he says there could be a place for the metal in a balanced portfolio.

“If central bankers continue to fight speculators and protect each other, Cyprus – like Greece, Dubai, Spain and Italy – should be contained, which will leave equities still the place to be,” he says.

“But maybe it makes sense to slowly build insurance cover and have some gold, because when equity falls come along – as they will – gold should rise, especially given the current negative sentiment and the fact that the Chinese are buying it up.”

One solution, Alan Steel suggests, is to buy holdings in funds that hold gold, such as those run by Troy Trojan or Darwin.

Adrian Lowcock of Hargreaves Lansdown also advises those looking to get into gold to look at funds. He advises: “Investors looking for gold exposure can get it either through an exchange-traded fund which accesses the physical gold – but they should ensure it is a physical gold ETF – or through funds such as  Blackrock Gold and General.”

He says that traditionally gold was a defensive buy against the long-term effects of inflation and currency movements, but that has changed. “Gold does still remain as a defensive asset, but it is questionable that it is still linked to inflation,” says Mr Lowcock. “Gold is increasingly sensitive to changes in sentiment as speculative and short-term investors can move easily in and out of it.