Central banks bought the most gold since 1964 last year just before the collapse in prices into a bear market underscored investors’ weakening faith in the world’s traditional store of value.
Nations from Colombia to Greece to South Africa bought gold as prices rose for an 11th year in 2011, highlighting the reversal of a three-decade-long bout of selling that diminished the world’s biggest bullion hoard by 19 percent. The World Gold Council says they added 534.6 metric tons to reserves in 2012, the most in almost a half century, and expects purchases of 450 to 550 tons this year, valued now at as much as $25.3 billion.
Central banks are the biggest losers, with about $560 billion of value erased since gold reached a record $1,921.15 an ounce in September 2011. The metal was already in the eighth year of its longest bull market since the end of World War I when reserves started expanding again in 2008. They were also buying in 1980 when bullion peaked at the equivalent of $2,400 in today’s money, and selling in 1999 as prices slumped to a 20- year low.
“They sell at the wrong time and buy at the wrong time,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “They aren’t traders. They are looking at it as a long-term holding, as an ultimate reserve currency. With the benefit of hindsight, they tend to get it wrong more often than not.”
Gold tumbled 12 percent to $1,467.90 this year and entered a bear market on April 12. By the end of the next trading day, prices had slumped 14 percent, the biggest two-day rout in three decades. Should the metal fail to rally by the end of the year, it would mark the first annual decline since 2000. Goldman Sachs Group Inc. is forecasting $1,390 in 12 months.
The timing of the rout is surprising because the events that sustained the bull market in the last several years are still unresolved. Central banks are printing money on an unprecedented scale as they seek to boost growth, Europe’s debt crisis is spreading and the International Monetary Fund is among those getting more pessimistic on the global economic outlook. Yet investors are now shunning an asset traditionally seen as a hedge against currency devaluation and fiscal turmoil.
Central banks owned 31,671 tons at the end of 2012, about 19 percent of all the metal ever mined, the London-based World Gold Council estimates. They accumulated the hoard over decades, with about 16 percent added in the 10 years through 1965, when prices were fixed at $35, or about $258 today once adjusted for U.S. inflation. President Richard Nixon formally ended the convertibility of dollars to gold in 1971.
Holdings peaked at 38,347 tons in 1965 and began their most recent contraction about a decade later. Nations from Canada to the U.K. to Belgium sold more than 2,000 tons in the 1990s, contributing to the 28 percent slump in prices and spurring an agreement between 15 central banks in 1999 to set annual sales limits. Disposals under the accord dwindled to less than 6 tons last year, compared with 400 tons when it started, and were eclipsed by the purchases of other central banks.
The U.K. had the world’s second-biggest reserves in 1958 and now ranks 18th. Gordon Brown, the finance minister at the time, sold about 400 tons in auctions from 1999 to 2002, getting no more than $296.50 and as little as $255.75. The nation raised almost $3.5 billion, which was invested in dollars, euros and yen. The gold is now valued at about $18.4 billion, data compiled by Bloomberg show.
Morgan Stanley expects central banks to buy another 655 tons through 2018, while the WGC anticipates purchases of at least 450 tons this year alone. The price slump may not deter them because of how much longer they typically hold assets relative to most investors. Russia and Kazakhstan expanded gold reserves for a sixth month in March, International Monetary Fund data showed today. Russian holdings rose 4.7 tons to 981.6 tons and Kazakhstan’s hoard grew 1.2 tons to 122.9 tons.
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“Central banks are strategic investors, and look at it as the currency of the last resort that lenders will gladly take,” said Rachel Benepe, who helps manage $2.2 billion of assets at the First Eagle Gold Fund in New York. “When there are any big moves, investors get panicked. Nothing has changed from our viewpoint. Gold is a hedge against policy actions, and governments globally are announcing policies that are unproven.”
The bear market is a blow to investors who anticipated that stimulus by central banks and the almost doubling of sovereign debt to $22.9 trillion since 2008 would debase financial assets and boost demand for the traditional store of value. The Bank of Japan and the Federal Reserve have said they need to keep buying bonds and the International Monetary Fund cut its 2013 estimate for world growth four times since July.
The plunge has encouraged some investors to buy more. The U.S. Mint said this week it ran out of its smallest American Eagle gold coin and purchases from the Perth Mint in Australia doubled. Standard Chartered Plc’s sales to India last week exceeded the previous record by 20 percent and UBS AG says physical flows there are near the highest since 2008.
Price swings are an “unavoidable risk” and aren’t a “big concern” because gold is a long-term strategy for diversifying currency reserves, the Bank of Korea said in a statement April 16. The central bank almost doubled its holdings to 104.4 tons by the end of March from a year earlier, still only equal to 1.6 percent of all its foreign reserves, WGC data show.
While the drop in prices is “extremely concerning,” the South Africa Reserve Bank won’t adjust its reserve policy, Governor Gill Marcus told reporters April 16. The bank holds 125.1 tons, little changed over the past decade. Gold traded in rand dropped about 17 percent since reaching a record Oct. 8.
The slump means Sri Lanka will “favorably” consider buying more, central bank Governor Ajith Nivard Cabraal said in a Bloomberg Television interview April 16. The nation has 3.6 tons of reserves, from 11.6 tons when prices peaked in 2011, according to WGC data.
Central banks and other bullion buyers aren’t the only losers. The Bloomberg Research Global Gold Mining & Exploration index of 190 companies tumbled 35 percent this year as the MSCI All-Country World Index of stocks gained 7.5 percent. The Standard & Poor’s GSCI gauge of 24 commodities retreated 3.3 percent and a Bank of America Corp. index shows Treasuries returned 0.7 percent.
Paulson & Co., the hedge fund company founded by billionaire John Paulson, is the biggest investor in the world’s largest exchange-traded product backed by bullion, with a holding at the end of 2012 equal to 65.7 tons. Paulson told clients in a letter that demand from central banks, India and China will support prices.
The money manager’s views aren’t shared by all his peers. Hedge funds trimmed bullish bets on gold by 40 percent this year, U.S. Commodity Futures Trading Commission data show. Holdings in ETPs contracted 13 percent to 2,299 tons, which combined with the price slump erased almost $36 billion from their combined value.
The slump into a bear market happened three days after a European Commission debt assessment said Cyprus had committed to sell about 400 million euros ($523 million) of gold. While the Cypriot central bank, ranking 61st globally for reserves, said it hadn’t discussed such plans, it spurred speculation that other distressed European economies would do the same. Portugal (182.046), Spain, Italy and Greece own 3,228 tons.
The U.S. and Germany are the biggest owners, with gold accounting for more than 70 percent of their total reserves. Both kept holdings little changed in the past decade. The U.S. officially values its bullion at $42.2222 an ounce.
“Central banks don’t think like traders, so don’t expect them to try and time the market,” said Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees more than $1 trillion of assets. “It’s not that they aren’t astute enough, but their focus is to diversify, and so they really don’t focus on prices.”
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