South Africa Reserves Drop Most in Nine Months on Gold

South African gold and foreign-currency reserves declined the most in nine months in February as the price of bullion fell and a stronger dollar erased the value of holdings of other currencies.

Gross reserves dropped 1.7 percent to $50.4 billion, the Pretoria-based Reserve Bank said on its website today. The median estimate in a Bloomberg survey of six analysts was $50.5 billion. Net reserves fell 1.9 percent to $47.2 billion.

“The decrease in the gross reserves mainly reflects valuation adjustments emanating from the decrease in the U.S. dollar gold price and the appreciation of the U.S. dollar against major currencies,” the bank said.

The price of gold dropped for a fourth month and the dollar gained against 14 of the major units tracked by Bloomberg in February, eroding the value of holdings of foreign currencies like the euro. The greenback gained 4 percent against the euro last month.

While the Reserve Bank will continue increasing reserves, it does not target a specific level, Deputy Reserve Bank Governor Daniel Mminele said today in Cape Town, according to a prepared speech e-mailed by the bank. The level of reserves is still low compared with peers, he said.

Central banks around the world are struggling to boost returns from investments given near-zero borrowing costs in the U.S. and Europe, he said.

‘Low Return’

“The low return environment has exacerbated the opportunity costs of holding reserves and induced a debate amongst central banks about ways of enhancing returns by moving higher on the risk-return frontier,” he said.

The bank posted three straight annual losses because of the cost tied to building reserves. The bank sells rand bonds to soak up excess liquidity as it buys dollars in a process it refers to as sterilization. The bonds it sells have a higher yield than the bank earns on investments in foreign reserves, causing a loss.

Gold reserves dropped 5.1 percent to $6.4 billion in February.

The rand pared its gain after the data was released. The currency rose 0.2 percent to 9.1037 against the dollar at 11:16 a.m. in Johannesburg.