Gold drop splits central banks as Sri Lanka sees opportunity

SPDR Gold

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% 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% drop in the SPDR Gold Trust cost 4.28 points more than calls betting on a 10% 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.

Central Banks

“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% 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.”

Gold Reserves

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.

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% more than the record set in September 2011 and 74% higher than today’s price.

Bloomberg News

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