Central banks hit as gold loses glitter

Economy April 18, 2013 00:00

By THE NATION, AGENCIES

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Central banks worldwide, including the Bank of Thailand (BOT), are among the biggest losers following the plunge in gold prices because they own 31,694 tonnes of the precious metal, or 19 per cent of all the gold mined, as global investors dump gold funds



With gold prices having fallen 18 per cent so far this year, central banks and the International Monetary Fund globally saw their combined value of gold reserves reduced by US$560 bil?lion to $1.4 trillion (Bt40.3 trillion). Policy banks added 534.6 tonnes of the metal to their reserves last year, the most since 1964.

About $773 billion was wiped off the value of all gold holdings globally on Monday, from about $8.3 trillion at the end of last week, based on futures and a 2011 estimate by the World Gold Council that 171,300 tonnes of the metal have been mined.

The value of the BOT’s gold reserves has also fallen, from $8.185 billion at the end of last year to $7.8 billion as of April 5.

It also turned out that the central bank had unloaded some gold ahead of the recent price plunge. At the price of $1,552.33 an ounce on April 5, that indicated Thai gold reserves of just over 141 tonnes.

According to the World Gold Council, which tracks gold supply and demand of all sectors, as of January, BOT’s Thailand reserves accounted for 152.4 tonnes, ranking it 25th in terms of gold weight.

Central bank governor Prasarn Trairatvorakul recently said the offi?cial gold reserves stood at 130 tonnes.

South Africa Reserve Bank Governor Gill Marcus on Tuesday described the gold-price decline as “extremely concerning”, but said the bank, holding 125.1 tonnes, would not adjust its reserve policy.

Sri Lanka’s central bank governor, meanwhile, said falling prices were an opportunity for nations to raise gold reserves and that the island-state would “favourably” examine buying more.

The Bank of Korea said the plunge was not a “big concern” because hold?ing the metal is part of a long-term strategy for diversifying currency reserves.

The price of gold bullion is now under pressure by some central banks’ attempts to unload reserves. Aside from Cyprus, there are rumours that Italy may follow suit in unloading gold reserves.

Cypriot President Nicos Anastasiades is trying to unlock €10 billion (Bt380 billion) of loans from the euro area and the International Monetary Fund. To do so, he must come up with a further €11 billion through measures including a tax on bank deposits of more than €100,000 at the country’s two biggest banks, the sale of assets and gold, and other tax measures.

Despite some central banks’ plans and the falling attractiveness of the metal, the World Gold Council believes central banks’ gold buying this year will remain unchanged from last year, at about 450-550 tonnes.

Marcus Grubb, the council’s man?aging director for investment, said in an interview at the Denver Gold Group’ s European gold conference in Zurich that so far, demand was on course to meet that figure.

However, central banks’ demand alone may not counter the cyclical price fall. Also pressuring gold prices is economic recovery, particularly in the US.

Growing economies and corporate profits, along with slowing inflation, have boosted global equities by $2.28 trillion this year at the expense of the traditional store of value, according to data compiled by Bloomberg.

Investors have, therefore, dumped gold investment in favour of equities.

Exchange-traded products linked to gold have dropped $37.2 billion so far this year, as the metal reached a two-year low yesterday.

Gold funds had suffered net out?flows of $11.2 billion through April 10, the most since 2011, while global and US equity funds had net inflows of $21.25 billion, according to US-based EPFR Global.

After rallying for 12 straight years, the metal has tumbled 29 per cent from its September 2011 record of $1,923.70 an ounce.

US  RECOVERY

Bullion lost ground as the US recovery gained momentum, the dol?lar rose and Federal Reserve policy-makers signalled they may scale back on stimulus, curbing demand for gold as a haven, the company said.

Goldman Sachs Group said on April 10 that the turn in the gold cycle was quickening and that investors should sell the precious metal.

The metal’s appeal as a hedge against inflation has been eroded partly by the slowing rise in US con?sumer prices, even after five years of government stimulus.

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

Gold, which typically does not pay interest or generate profits on its own, has traditionally become more popular as investors are concerned that the values of other assets will be eroded by inflation.