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Gold appeals as Cyprus banks founder

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When in doubt invest in shiny metals. That would seem to be the instinctive response to the banking crisis in Cyprus, judging by the sudden leap in gold prices. Gold value has increased by around one percent since the Cypriot fiscal meltdown. It’s a phenomenon that has a touch of irony since the ancient economy of the island was built on precious metals, whereas now it tends to be reliant on dubious financial dealings with Russian expats.

Human instinct rather than cold logic seems to regard gold as a safe haven in times of economic uncertainty. With the Cyprus government still trying to find a solution that would avoid a levy on its citizens’ bank accounts, shiny ingots became the refuge of choice for some shaky investors.

Angelos Damaskos, a gold fund manager, told the Telegraph that gold remains an attractive alternative to banks, saying that the Cyprus crisis, "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."

It’s a hedge only up to the point where it would need to be converted into liquid assets. Gold’s value remains symbolic rather than intrinsic. In short it’s a pure investment product to weather stormy investment climates, that still relies on a certain stability to prevail eventually.

Although Cyprus is a relatively tiny element of the EU economy, the extreme measures that have been suggested to prevent bank failure have sent a wave of panic through larger, vulnerable economies like Spain, Portugal, Ireland and Greece. The danger is that it could spark a run on the banks as investors look to move their cash to stronger economies such as the US and Germany, or to change their euros into ingots.

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