Gold drop splits central banks as Sri Lanka sees opportunity

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% 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% 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 3% at $1,388.36 by 1:02 p.m. in London, cutting its slide this year to 17%. That would be the biggest annual decline since 1997. Prices slumped 14% in the two days through yesterday, the most since February 1983. Since starting to appreciate in 2001, gold has gained 410% compared with an increase of 18% in the Standard & Poor’s 500 Index of stocks.

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% 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.

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