Cypriot Bank Crisis Boosts Demand for Gold

March 27, 2013 at 09:16


The Cypriot banking crisis reminds even the most trusting savers that not all banks or jurisdictions are safe – and is boosting demand for gold, bullion dealers claim.

As if to prove the old adage that it’s an ill wind that blows no good, enthusiasts for the precious metal argue that financial shocks in the eurozone are reminding savers of gold’s attractions.

A YouGov survey of 2,000 investors for found that 11 per cent of them said they were more likely to invest in gold following the Cyprus banks crisis. Nearly one in four – or 23 per cent – of those living in London shared that view.

Daniel Marburger, a director of Jewellers Trade Services Partners (JTS) said demand for gold coins has doubled since the Cyprus crisis began, with 1oz Gold Britannia coins being the most popular within the United Kingdom, and 1oz Gold Maple Leaf coins the most popular in other markets.

He said: “The situation in Cyprus has reignited the wider Eurozone sovereign-debt crisis. At a time like this, people are attracted to gold because it is the ultimate crisis commodity.

“The proposed levy on deposits of Cyprus’s savers has not only shaken confidence in the single-currency Eurozone, it illustrates the fragility of savings held within the banking system. In our experience, clients are attracted to gold because it offers insurance against extreme movements in the value of other assets. Unlike paper currency, it will never lose its intrinsic value.”

That prompts the question: just what is the intrinsic value of a metal that yields no income and has limited utility in the hands of most holders? One answer, in the case of gold coins, is rather less than you would have to pay to buy them.
For example, a single Maple Leaf would currently set you back £1,090 or about 2.7pc more than the spot gold price. Similarly, a single Britannia coin costs £1,110 or 4.9pc more than the price of the bullion it contains.

It is not clear why British investors should have to pay nearly twice the premium over intrinsic value than other investors. On a brighter note, British gold coins which are legal tender remain exempt from Capital Gains Tax.
But much of the metal’s appeal is based on distrust of other stores of value, as Adrian Ash of BullionVault explained: “Banking crises tend to concentrate the mind, and buying gold is an obvious escape route.

“The events in Cyprus prove once again that bank customers do face risks as creditors who are owed money. Until news of the first, disastrous Cyprus deal, activity was very much in line with the same time last year.

“As a comparison, we’ve had 65pc more people buying gold on BullionVault than we did in the week after Lehman Brothers collapsed.”

Against all that, there is scant evidence of increased demand pushing up the gold price. One explanation is that institutional investors rather than individuals determine valuations in this global market. Despite the dismal impact of the Greek tragedy on tiny Cyprus, most institutional investors seem to believe there is better value to be had than bullion can deliver at current prices.