The biggest drop in gold prices since 1983 has divided central banks on whether the metal is cheap enough to increase investment.
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. 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 own about 19 percent 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 28 percent 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 today 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 slid to $1,321.95 today, the lowest since January 2011, before gaining 2.1 percent to $1,376.10 at 7:41 p.m. in London, paring this year’s slide to 18 percent. That would be the biggest annual decline since 1997. Prices slumped 14 percent in the two days through yesterday, the most since February 1983. Since starting to appreciate in 2001, gold has gained 410 percent compared with an increase of 18 percent 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 Inc. said in a report today. The island nation owns 13.9 metric tons 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. The 57-year-old began the year with about $9.5 billion invested across his hedge funds, of which 85 percent was in gold share classes. He’s sticking with his thesis that gold is the best hedge against inflation and currency debasement, John Reade, a partner and gold strategist at New York-based Paulson & Co., said in an e-mailed statement.
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 percent this year to 2,382.4 tons, according to data compiled by Bloomberg. Assets reached a record 2,632.5 tons in December.
The cost of protecting gold from losses in the options market increased. Puts protecting against a 10 percent drop in the SPDR Gold Trust cost 4.28 points more than calls betting on a 10 percent gain, the biggest difference on record, according to three-month data compiled by Bloomberg.
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 today 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.”
Sri Lanka owns 3.6 tons of gold, according to council data.
Short-term price moves are an “unavoidable risk,” the Bank of Korea, which holds 104.4 tons, said in an e-mailed statement. Bullion’s 100-day historical volatility was at 20.7 percent yesterday, about double last month’s level, according to data compiled by Bloomberg.
“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 today. “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.”
The gold price decline is “extremely concerning,” South Africa Reserve Bank Governor Gill Marcus told reporters in Cape Town today. The bank, which holds 125.1 tons, won’t adjust its reserve policy following the slump in gold prices, Marcus said.
Nations and government institutions hold a total of 31,694.8 tons, the data show. 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.
“It’s too early to say if Russia’s central bank will start to sell gold to invest in other currencies, Oleg Vyugin, former first deputy chairman at Bank Rossii and chairman of MDM Bank, said by phone. ‘‘It’s not clear how the crisis that started in 2008 will end” and Russian monetary authorities will probably maintain purchases, Vyugin said.
An April 9 debt assessment by the European Commission said that Cyprus had committed to selling around 400 million euros ($523 million) of “excess” gold reserves. The Cypriot central bank responded to that disclosure by saying it hadn’t discussed plans for a sale.
Central banks in Europe, including non-euro members Sweden and Switzerland, have committed to keep their sales of gold below 400 ton a year until at least Sept. 27, 2014. Led by the European Central Bank, the national central banks affirmed in August 2009 that “gold remains an important element of global monetary reserves,” adding that total sales over the period 2009-2014 wouldn’t exceed 2,000 tons.
During that period, even though the IMF committed to sell 403 tons of gold in September 2009, it said it would do so within the gold agreement’s limits, so as not to add volatility to the global market for the metal.
Adjusted for inflation, gold’s 1980 peak of $850 would be equal to $2,413 today, data compiled by the Federal Reserve Bank of Minneapolis show. That’s still 26 percent more than the record set in September 2011 and 76 percent higher than today’s price.