Gold Wipes $560 Billion From Central Banks as Equities Rally

April 17 (Bloomberg) -- Bloomberg's Alix Steel and Economics Editor Michael McKee talks with Betty Liu about the pressure on gold and commodities as one report targets gold to fall to $800. They speak on Bloomberg Television's "In The Loop."

Investors are dumping gold funds at the fastest pace in two years in favor of equities, compounding a slump that has wiped $560 billion from the value of central bank reserves.

Exchange-traded products linked to gold dropped $37.2 billion in 2013 as the metal reached a two-year low yesterday. Gold funds suffered net outflows of $11.2 billion this year through April 10, the most since 2011, while global and U.S. equity funds had net inflows of $21.25 billion, according to Cambridge, Massachusetts-based EPFR Global.

Central banks are among the biggest losers because they own 31,694.8 metric tons, or 19 percent of all the gold mined, according to the World Gold Council in London. After rallying for 12 straight years, the metal has tumbled 28 percent from its September 2011 record of $1,923.70 an ounce. Growing economies and corporate profits, along with slowing inflation, boosted global equities by $2.28 trillion this year at the expense of the traditional store of value, according to data compiled by Bloomberg.

“There’s a perception that risk has been lessened, and with that, investors are looking for assets that either generate income or have growth potential, neither of which gold has,” Anthony Valeri, a market strategist with LPL Financial Corp. in San Diego, which oversees $350 billion. “We’ve seen a grab for yield, and without a yield, gold has been left out.”

Photographer: Guenter Schiffmann/Bloomberg

Exchange-traded products linked to gold dropped $37.2 billion in 2013 as the metal reached a two-year low yesterday. Close

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Photographer: Guenter Schiffmann/Bloomberg

Exchange-traded products linked to gold dropped $37.2 billion in 2013 as the metal reached a two-year low yesterday.

Bear Market

Gold futures in New York slumped 17 percent this year, the worst start since 1981, after a 9.3 percent drop on April 15 that capped the biggest two-day decline since January 1980. The metal tumbled into a bear market on April 12, losing more than 20 percent since the record close in August 2011, the common definition of bear market.

Related: The Real Cost of Owning Gold

Bullion lost ground as the U.S. recovery gained momentum, the dollar rose and Federal Reserve policy makers signaled they may scale back on stimulus, curbing demand for gold as a haven. Goldman Sachs Group Inc. said April 10 that the turn in the gold cycle was quickening and that investors should sell gold.

The metal’s appeal as a hedge against inflation has been eroded partly by the slowing rise in consumer prices even after five years of government stimulus. The cost of living in the U.S. fell 0.2 percent in March, the first drop in four months, as cheaper gasoline and clothing kept consumer prices in check, Labor Department data showed yesterday. Inflation expectations as measured by the break-even rate for five-year Treasury Inflation Protected Securities reached the lowest since Jan. 2.

Attractive Equities

At the same time, the S&P 500 has more than doubled from its 12-year low in 2009, helped by the Federal Reserve’s unprecedented bond purchases, record-low interest rates and three straight years of profit growth.

“The equity trade is looking attractive because the fundamentals in the U.S. economy continue to improve,” John Stephenson, a senior vice president and portfolio manager who helps oversee C$2.8 billion ($2.74 billion) at First Asset Investment Management Inc. in Toronto, said in a telephone interview. “It’s been a great 12-year run, but there’s increasingly less reason to be in gold.”

Gold, which typically doesn’t pay interest or generate profits on its own, has traditionally become more popular when investors are concerned that values of other assets will be eroded by inflation.

‘Bubble’

“If you think about the intrinsic value of gold, there’s not a lot,” Guy Debelle, assistant governor at Australia’s central bank, which owns 79.9 tons, said at a business lunch in Canberra on April 16. “Gold often has a high price because people believe that other people believe that it’s worth a lot. When you describe other markets like that, the word ‘bubble’ gets thrown about.”

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Individual investors added $19.5 billion this year to mutual funds holding U.S. equities, after removing $400 billion in the previous four years, according to the Washington-based Investment Company Institute.

“Since the opportunity cost to hold gold was very high, people moved to the more remunerative assets like equities and cash,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama.

Remaining Bullish

Some investors remain bullish.

Billionaire John Paulson, 57, is sticking with his bet on higher prices. He started 2013 with about $9.5 billion invested across his hedge funds, of which about 85 percent is invested in gold share classes. This year’s slump through April 15 erased $1.5 billion of his personal wealth, on paper. Paulson is sticking to the thesis that the metal is the best hedge against inflation and currency debasement as countries pump money into their economies, according to the New York-based firm that manages about $18 billion.

“The outlook for gold for us is really positive in the long term,” Catherine Raw, a fund manager in London at BlackRock Inc., which oversees about $3.8 trillion globally, said in an interview yesterday on Bloomberg Television with Francine Lacqua. “The probability of inflation over the next five years is higher, not lower, than it was last year. Other things, such as cash losing money, the Cyprus event, savings being targeted, means people are looking for alternatives.”

Top Holders

BlackRock is the top holder in the iShares Gold Trust, with 5.9 percent, and the fifth-biggest in the SPDR Gold Trust, an exchange-traded fund backed by the metal. Paulson & Co. is the largest investor in the SPDR at 5.7 percent, according to government filings. Holdings in that fund fell to 1,145.92 tons on April 16, the lowest since April 23, 2010.

Global ETP holdings are down 9.7 percent this year. Assets reached a record 2,632.5 tons in December. The value fell on April 15 to $103.24 billion, the lowest since May 2011.

Gold’s slump has eroded the value of reserves held by the world’s central banks and the International Monetary Fund to about $1.4 trillion from the record $1.96 trillion, based on World Gold Council data. Policy banks added 534.6 tons last year, the most since 1964, according to the group.

The U.S. and Germany are the biggest holders, with the metal accounting for more than 70 percent of their total reserves. Russia, the seventh-biggest holder with 976.9 tons, boosted buying in the past seven years.

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 analysts said in a report yesterday. The island nation owns 13.9 tons, according to the council.

‘Extremely Concerning’

The gold price decline is “extremely concerning,” South Africa Reserve Bank Governor Gill Marcus told reporters in Cape Town yesterday. The bank, which holds 125.1 tons, won’t adjust its reserve policy following the slump, Marcus said.

Sri Lanka’s central bank governor said falling prices are an opportunity for nations to raise gold reserves and that the island will “favorably” 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.

About $773 billion was wiped from the value of all gold holdings globally on April 15, to about $7.5 trillion from $8.3 trillion last week, based on futures and a 2011 estimate by the World Gold Council that 171,300 tons of the metal have been mined. The amount erased is greater than the market capitalization of all the stocks trading in Singapore, according to data compiled by Bloomberg.

Investors Selling

“People are moving to equities as it is the most remunerative asset,” Jeffrey Sica, who helps oversee more than $1 billion as the president of SICA Wealth Management in Morristown, New Jersey, said in an interview yesterday. Sica said he cut his gold holdings to about 7 percent from 20 percent of assets on concern that the plunge may continue.

Billionaire investor George Soros, who called bullion the “ultimate asset bubble” in 2010, reduced his stake in the SPDR gold fund by 55 percent in the fourth quarter.

“Gold has somehow lost the safe-haven status,” said Robert Keck, the president of Princeton-based 6800 Capital LLC, which manages about $630 million. “A lot of money has definitely flown into equities this year. While the economic data may have some hits and misses, equities are being clearly preferred over gold.”

To contact the reporters on this story: Debarati Roy in New York at droy5@bloomberg.net; Joe Richter in New York at jrichter1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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