Central banks are still stockpiling gold, despite a hefty drop in its price. Photo: Jim Rice
Ben Bernanke, the world’s most-powerful central banker, says he doesn’t understand gold prices.
If his peers had paid attention, they might have stopped expanding reserves that lost $US545 billion ($577 billion) in value since bullion peaked in 2011.
Bernanke, who holds economics degrees from Harvard College and the Massachusetts Institute of Technology and led the Federal Reserve through the biggest financial disaster since the Great Depression, told the Senate Banking Committee in July that “nobody really understands gold prices and I don’t pretend to really understand them either.”
Central banks, which own 18 per cent of all the gold ever mined, will add as much as 350 tonnes valued at about $US15 billion this year, the London-based World Gold Council estimates.
They purchased 535 tonnes in 2012, the most since 1964. Russia is the biggest buyer, expanding reserves by 20 per cent since prices reached a record $US1921.15 an ounce in September 2011. Gold has slumped 31 per cent since then.
As policy makers were buying, investors were losing faith in the metal as a store of value. The value of exchange-traded products dropped by $US60.4 billion, or 43 per cent, this year, saddling hedge fund manager John Paulson with losses, according to data compiled by Bloomberg.
Billionaire investor George Soros sold his holdings in the biggest gold-backed ETP this year and mining companies wrote down the values of their assets by at least $US26 billion.
Policy makers, who are responsible for shielding their economies from inflation, often mistime gold investment decisions, buying high and selling low. They were reducing holdings when bullion reached a 20-year low in 1999 and as prices as much as quadrupled in the next nine years. Central bankers became net buyers just before the peak in 2011.
“Central bankers have typically bought when you probably should be selling and selling when you probably should be buying,” said Michael Strauss, who helps oversee about $US25 billion of assets as chief investment strategist and chief economist at Commonfund Group in Wilton, Connecticut. “It’s going to be a difficult market and sometimes the price of gold is driven by emotions rather than fundamental factors. Central banks have been bad traders of gold.”
Holdings were little changed from the start of 2008 through early 2009. Then, policy makers increased gold reserves as prices doubled and they have purchased a net 884 tonnes since the 2011 peak, International Monetary Fund data show. Russia was the biggest buyer, adding about 171 tonnes. Kazakhstan bought 67.2 tonnes and South Korea purchased 65 tonnes. Turkey’s reserves swelled about 371 tonnes in the past two years as it accepted bullion in reserve requirements from commercial banks.
In addition to buying when prices rose, central banks sold into slumping markets, disposing of about 5899 tonnes in the two decades from 1988, equal to about two years of current mine supply.
The UK auctioned about 395 tonnes from July 1999, a month before prices reached a two-decade low, through March 2002. Gold averaged about $US277 as the country was selling. The Bank of England’s hoard of ingots and coins, including a bar smelted in New York in 1916, now totals 310.3 tons, or 13 per cent of the nation’s total reserves.
Warren Buffett, the fourth-richest person in the Bloomberg Billionaires Index and the world’s most successful investor, has said the metal has no utility because it moves to vaults once mined. While countries from the US to the UK adopted a gold standard by the 19th century to limit inflation, no central bank or government institution links currencies directly to the metal anymore. The Fed, created a century ago, cut the dollar’s ties to gold four decades ago.
Bernanke, when asked to explain gold’s volatility and the long-term impact of reducing economic stimulus, told the Senate Banking Committee July 18 that investors see a reduced need for “disaster insurance.” In a Congressional hearing two years ago, he described the commodity as an asset rather than money and said central banks own bullion as a “long-term tradition.”
Following that tradition has proved a poor investment decision. Kazakhstan almost doubled reserves the past two years and South Korea expanded them sevenfold since mid-2011.
“Bernanke was suggesting in his own way that too much importance is given to gold, it’s too hyped,” said Nouriel Roubini, professor of economics and international business at New York University. “Gold is not a currency.”