Gold drop splits central banks as Sri Lanka sees opportunity

The biggest drop in gold prices since 1983 has divided central banks on whether the metal is cheap enough to increase investment.

By Nicholas Larkin (Bloomberg)

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Published: Wed 17 Apr 2013, 10:43 PM

Last updated: Sat 4 Apr 2015, 7:50 AM

Sri Lanka’s central bank governor said falling prices are an opportunity for nations to raise gold reserves and that the island will ‘favourably’ examine buying more. The Bank of Korea said the plunge isn’t a ‘big concern’ because holding the metal is part of a long-term strategy for diversifying currency reserves. Reserve Bank of Australia’s assistant governor said bullion has no ‘intrinsic value.’ South Africa’s central bank governor won’t adjust its reserves policy.

Central banks hold about 19 per cent of all gold ever mined, and last year boosted their holdings by the most since 1964, according to the London-based World Gold Council. The metal, which rallied for the past 12 years in the longest gain in at least nine decades, has lost 29 per cent since climbing to a record $1,921.15 an ounce in September 2011.

“The question you have to ask is, is the economy back on track?” Gerald Panneton, president and chief executive officer of Detour Gold Corp, a Toronto-based producer, said on Tuesday at a conference in Zurich. “Actually the situation is the same. In the last few days we saw people jumping off the ship as if it’s sinking. There’s nothing wrong with the ship.”

Gold for immediate delivery fell to $1,321.95 on Tuesday, the lowest since January 2011, and was up 2.9 per cent at $1,387 by 11:18am in London, cutting its slide this year to 17 per cent. That would be the biggest annual decline since 1997. Prices slumped 14 per cent in the two days through Monday, the most since February 1983. Since starting to appreciate in 2001, gold has gained 409 per cent compared with an increase of 18 per cent in the Standard & Poor’s 500 Index of stocks.

The selloff was sparked by mounting concern that Cyprus would be forced to sell gold from its reserves and “potentially reflecting a larger monetization of gold reserves across other European central banks,” Goldman Sachs Group said in a report on Tuesday. The island nation owns 13.9 metric tonnes of bullion, according to World Gold Council data. The metal’s drop wiped out almost $1 billion of hedge-fund manager John Paulson’s wealth in the past two days.

Paulson is the largest investor in the SPDR Gold Trust, the biggest bullion-backed exchange-traded product. Global holdings in the products declined 9.5 per cent this year to 2,382.4 tonnes, according to data compiled by Bloomberg. Assets reached a record 2,632.5 tonnes in December.

The rally which billionaire George Soros called a bubble at the World Economic Forum’s convention in Davos, Switzerland three years ago lasted for 12 years through 2012 as investors bet faster inflation, central bank stimulus and banking and sovereign debt concerns would spur demand for the metal as a protection of wealth. “Overall, gold prices coming down is giving an opportunity to various central banks across the world to improve on their holdings,” Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said on Tuesday in an interview with Rishaad Salamat on Bloomberg Television.

“An opportunity that provides us with space to purchase a little more quantities and hold in our own reserves would be an interesting one.”

Short-term price moves are an ‘unavoidable risk,’ the Bank of Korea said in an e-mailed statement. Bullion’s 100-day historical volatility was at 20.7 per cent on Monday, about double last month’s level, according to data.

“If you think about the intrinsic value of gold, there’s not a lot,” Australia’s Guy Debelle said at a business lunch in Canberra on Tuesday.

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