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Gold Tumble Divides Central Banks as Sri Lanka Sees Opportunity

Tuesday, 16 April 2013 06:21 AM

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 Assistant Governor Guy Debelle said bullion has no “intrinsic value.”

Central banks hold about 19 percent of all gold ever mined, and last year they 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 best run in at least nine decades, has lost 29 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 fell to $1,321.95 today, the lowest since January 2011, and was up 1.9 percent at $1,373.50 by 9:33 a.m. in London, cutting its slide this year 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.

Goldman Sachs

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.

“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.”

Bullion’s 100-day historical volatility was at 20.7 percent yesterday, about double last month’s level, according to data compiled by Bloomberg. Short-term price moves are an “unavoidable risk,” the Bank of Korea said in an e-mailed statement.

‘Intrinsic Value’

“If you think about the intrinsic value of gold, there’s not a lot,” the RBA’s Debelle 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.”

Nations and government institutions hold 31,694.8 tons of gold, council data show. The U.S. and Germany are the biggest holders, with the metal accounting for more than 70 percent of their total reserves.

“This is an excellent buying opportunity,” Henk Krasenberg, chairman of the European Gold Centre, a gold research company in Laren, Netherlands, said at the conference in Zurich. “The fundamentals are still strong. I’d be happy with a recovery back to $1,700 or $1,800 by the year end.”

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The biggest drop in gold prices since 1983 has divided central banks on whether the metal is cheap enough to increase investment.
Tuesday, 16 April 2013 06:21 AM
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