Ben Bernanke, the most powerful central banker, says he does not understand gold prices. If his peers had paid attention, they might have stopped expanding reserves that have lost $545 billion (about R5 trillion) in value since 2011.
Policymakers, 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 then became net buyers just before the peak in 2011.
They have purchased a net 884 tons since the 2011 peak, International Monetary Fund data show. Russia was the biggest buyer, adding 171 tons.
Central banks also sold into slumping markets, disposing of about 5 899 tons in the two decades from 1988. That was equal to about two years of current mine supply.
The UK auctioned about 395 tons from July 1999, a month before prices reached a two-decade low, to March 2002. Gold averaged $277 an ounce as the country was selling.
Bernanke, when asked to explain gold’s volatility and the long-term impact of reducing economic stimulus, told the Senate banking committee on July 18 that investors saw 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 owned bullion as a “long-term tradition”.
“Bernanke was suggesting in his own way that too much importance is given to gold; it’s too hyped,” said Nouriel Roubini, a professor of economics and international business at New York University. “Gold is not a currency.”
Bullion rose 70 percent from December 2008 to June 2011 as the Federal Reserve debased the dollar by pumping more than $2 trillion into the financial system, spurring demand for a hedge against inflation. That protection has not been needed: US consumer prices have risen at an average annual rate of 1.7 percent in the past five years, compared with a four-decade average of 4.3 percent.
After taking inflation into account, gold is worth almost half of what it was in 1980. That year it reached a then record $850 after US political and financial turmoil in the late 1970s caused a surge in consumer prices. The metal is valued at $464 in 1980 dollars.
The most accurate analysts say the bear market will deepen. Goldman Sachs and Société Générale correctly forecast this year’s rout.
Goldman Sachs says prices will drop to $1 110 in 12 months and Société Générale sees an average of $1 125 in 2014. Prices will average $1 300 in the fourth quarter, the lowest in three years, according to the median of 12 analyst estimates.
Central banks bought the metal as the Fed’s balance sheet swelled fourfold since 2008 and policymakers around the world dropped interest rates to record lows. The European debt crisis sparked concern that nations would be forced out of the euro.
“There was a widely circulated belief that the euro as a currency will cease existing,” said Michael Aronstein, the president of Marketfield Asset Management in New York.
“A lot of foreign central banks thought they cannot keep the euro and did not want to increase dollars. It was desperation and fear that drove the surge in demand.”
But while gold is trading below the 1980 high on an inflation-adjusted basis, it has still been better than the dollar in preserving its purchasing power. A dollar bought about 2.8 litres of milk in 1970, a year before the gold standard ended, and an ounce of gold bought 106 litres. By the end of 2011, a dollar got you just less than a litre of milk and an ounce of bullion 1 590 litres.
Holding gold is a reasonable, prudent strategy and central bankers were probably building reserves with a one- to two-decade view rather than one to two years, Nathan Sheets, the former head of the Fed’s international finance division and now the global head of international economics at Citigroup, said in August.
The US, Germany and Italy, which together own 44 percent of all central bank holdings, have changed gold reserves by less than 3 percent since the start of 1999. – Bloomberg