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Will Cyprus Turn the Tide for Gold?

Source: World Gold Council

Gold prices climbed to a two-and-a-half week high of $1,608.30 an ounce on Monday as the controversial bailout plan for Cyprus, which threatens renewed uncertainty in the euro zone, led to buying of the safe-haven metal.

However, doubts remain over whether the bounce in the precious metal that has fallen out of favor with investors this year, down 4 percent since the start of 2013, can be sustained.

According to Warren Gilman, chairman and CEO of investment firm CEF Holdings, a long-term gold bull, this does not mark a turning point for the safe haven asset.

(Read More: Cyprus Bailout Crisis Slams Brakes on Risk-On)

"I don't think the gold trade will come back. This is a short-term run. By the end of this week we'll sell off again," he said, noting that the worries over the Cyprus bailout deal will pass, and risk appetite will return given the brightening outlook for the U.S. economy.

Ric Spooner, chief market analyst at CMC Markets Asia Pacific agrees, noting that the upside in gold is not yet "conclusive."

"The markets had an initial reaction, but they will take a wait and see attitude to see how significant the response is from European investors tonight and how this plays out over the next few days," he said.

Traders have become used to waiting for situations to evolve before acting, he added.

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Spooner said a key level he is watching is $1,635 - 2.4 percent higher than current levels - as an indicator of the momentum in the gold trade.

(Read More: Cyprus Finance Minister: We Hope People Will Believe Us)

"To really take the view that what we are seeing is an upward correction against the recent downtrend, I would want to see it break above that level [$1,635]," he said. "If it did, that would be a sign of a more serious rally."

Tom Price, global commodity analyst at UBS, however, believes the case for gold is rising with the new element of uncertainty the Cyprus bailout has cast in Europe.

Euro zone finance ministers want Cypriots with deposits of over 100,000 euros ($128,950) to fork out 9.9 percent of their savings while those with less than a hundred thousand euros will be hit with a 6.75 percent levy in order to raise 5.8 billion euros, so that the country is eligible for an international bailout. Investors are concerned that taxing depositors will set a dangerous precedent for the euro zone and ultimately risk runs on regional banks.

"One of the reasons gold has been coming off is that there has been a view that the risk in Europe was limited and most of their financial market issues were resolved - this Cypriot package highlights a new risk relating to the terms of the deal," Price said.

(Read More: Cyprus Bailout 'Disaster' Risks New Euro Crisis)

"This uncertainty could provide a brand new support for gold for days or even weeks," he added.

Price expects the precious metal to trade in a range of $1,600-$1,700 in the coming weeks.

However, he said that if European policymakers provide clarity on why Cyprus has been assigned such bailout terms, highlighting that it is a one-off, then gold will likely fall out of favor with investors once again.