"I have of late sent a couple of questions on the chart library and the protection of profits accrued in the last one year plus in terms of currency related issues now occurring if one has banked a proportion of profits now sitting in cash. Firstly many thanks for giving me the opportunity of having the worry in the first place. In the light of the present currency and debt related problems would it not be prudent with the cash proportion of one's portfolio to hedge it, for example against the New Zealand or Australian dollars. I would agree with reference to the chart library that there might well be a case for suggesting that this pound versus other currencies "correction" might be over-baked. However in the light of recent days it might be considered as being possibly prudent?"

Eoin Treacy's view Thank you for this interesting question which has been voiced in a similar vein by other subscribers. The continuing Southern European debt crisis in tandem with hyperbole associated with the upcoming UK election has focused the minds of investors on the safety of their investment not least their cash deposits. There is no easy answer to the question of hedging, but I believe it would be instructive to compare the performance of some European financials instruments to their UK counter parts instruments in order to shed some light on this issue.

While Greece has been the focus of media attention over the last few months, this week contagion took over as the primary concern for many investors, with Portuguese bonds taking the brunt of selling pressure. As I see it, the primary question is whether there is a high risk that this contagion will spread to the UK, because the Bank of England has demonstrated it is willing to allow the Pound to be the pressure valve for such fears.

Greek, Portuguese, Spanish and Irish yields have all advanced in the last couple of weeks, some spectacularly so. Corresponding UK yields have been steady to lower over the same timeframe.

Greek, Portuguese, Spanish and Irish spreads over the German 10yr have all surged higher this month. The UK 10yr spread over the same benchmark, in local currencies, has been trending upwards for much of the last year.

CDS spreads on Greek, Portuguese, Spanish and Irish bonds show similar trajectories to their respective government bonds with UK CDS spreads relatively static.

The Greek and Portuguese stock markets accelerated lower over the last two weeks and found at least short-term support yesterday. Today's bounce is helping to unwind the short-term oversold condition but these markets are serial laggards and would need to sustain moves above 2160 and 8350, respectively, to indicate demand has regained medium-term dominance beyond the current short covering rally.

The Spanish market encountered resistance in the region of the 200-day moving average and pulled back to the psychological 10,000 from where it is currently bouncing. However, it needs to sustain a move back above 11,600 to indicate demand has returned to medium term dominance.

The Irish market is comparatively overextended relatively to the 200-day moving average and encountered resistance in the region of the September high earlier this week. Some further consolidation of the last two-months gains is a distinct possibility but a sustained move below the 200-day moving average would be required to question medium-term upside potential.

The FTSE-100 remains in a consistent medium-term uptrend. The Index was overextended relative to the 200-day MA when it encountered resistance in the region of 5850 three weeks ago. It has since pulled back to test the round 5500, but a sustained move below the MA would be required to question the consistency of the overall uptrend.

The Euro Stoxx Banks Index encountered resistance at the lower side of the overhead range and the 200-day moving average three weeks ago. It firmed in the region of the February lows today, but a sustained move above 215 would be required to break the six-month progression of lower rally highs and suggest demand is returning to dominance.

The FTSE-350 Banks Index encountered resistance in the region of the September high two weeks ago and bounced from the 200-day MA yesterday. A sustained move below 5000 would question short-term potential for additional higher to lateral ranging, while a decline below 4500 would break the 18-month progression of higher reaction lows and suggest a lengthier pause.

The Trade Weighted Euro Index remains in a six-month downtrend within the broad medium-term top formation. A sustained move above 134 would be required to break the progression of lower rally highs and question supply dominance.

The Trade Weighted British Pound Index has posted a succession of equal or higher reaction lows since January 2009 and is now testing the upper side of the six-month range. A sustained move below 76 would be required to break the short-term uptrend while a decline below 73 would question medium-term upside potential.

The Pound is in a steep downtrend against the Australian Dollar and while overextended it remains consistent. It has been ranging below A$1.68 since early March and there has been an absence of upward dynamics. The progression of lower highs would need to be taken out to question potential for some additional downside. However, this is a popular momentum trade. New entrants would be doing so in the full knowledge that they are not early.

Gold quoted in Euro continues to extend the medium-term uptrend and broke upwards to new highs last week. A sustained move below €860 would be required to check the advance beyond a brief pause.

Gold quoted in British Pounds broke upwards from the 1-month range on Tuesday and would need to sustain a move below £750 to question potential for further upside.

There is no evidence in the above charts that Southern European debt problems are about to spread to the UK. There are fundamental differences between the economies of Greece and Portugal compared to the UK but apart from size, breadth, London's financial centre and the international scope of the UK's financial markets, the UK can control its own currency. The Bank of England has amply demonstrated that it is willing to employ every means necessary to support the economy. Troubled Eurozone countries are playing with an arm tied behind their backs in this regard because they have no control over the Euro.

The currency charts above show the Pound is relatively firm against other weak currencies. Gold, which due to its current performance can be considered a middle of the road currency, is appreciating faster in Euro than in Pounds, but is notably weaker against emerging and commodity related currencies.

The question of hedging a cash position will depend entirely on one's frame of reference and potential end use for the reserve. A comparison of the Pound to the US Dollar, Yen, Euro or Swiss Franc will look very different from a comparison to the Canadian Dollar, Australian Dollar, Brazil Real or New Zealand Dollar. Gold's recent strength, particularly against the Pound and Euro demonstrate its infallible quality as a benchmark against which to compare fiat currencies. Such a large number of countries have resorted to dilution of their respective currencies, as part of the solution to various debt problems, that investors are reevaluating the merits of gold as a potential hedge.