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Central banks consider revising gold holdings amid recent price declines

TradingPub Admin | April 17, 2013

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If you want some basic futures trading education on how the actions of major financial institutions can impact contracts related to gold, it could be helpful to know how central banks across the world are considering changing their holdings of the precious metal in response to its recent price declines. 

Plunging gold prices
The price of the precious metal fell into a bear market during the week ending on April 12, as defined by the asset losing 20 percent of its value since reaching a recent high. 

The commodity continued this slide the following week, with spot gold contracts falling to as little as $1,321.95 on April 16, which was the least since January 2011, according to Bloomberg News. At the time of report, gold had fallen almost 20 percent in 2013. 

Central bank use
Central banks across the world still hold ample gold reserves in order to support their risk management efforts, The Economic Times reports. Currencies were supported by the gold standard for many years, and even though the Bretton Woods system no longer exists, these financial institutions harness the metal for the purpose of hedging against risks associated with inflation and fluctuating exchange rates. 

Opportunity
Some central bank officials have viewed the recent sharp declines in the price of the precious metal as being a positive development, offering these organizations a chance to bolster their holdings, according to Bloomberg. 

"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 stated during a Bloomberg interview. "An opportunity that provides us with space to purchase a little more quantities and hold in our own reserves would be an interesting one." 

The central bank official stated that his organization will consider increasing its holdings, and indicated that it will review such a move "quite favorably," the media outlet reports. Increasing its reserves could potentially impact Sri Lanka's balance of payments, which Cabraal indicated the central bank planned to monitor "closely." 

Mixed reactions
While Cabraal reacted well to the news of falling gold prices, not all central bank officials were as optimistic. South Africa Reserve Bank Governor Gill Marcus referred to the sharp depreciation in the precious metal as being "extremely concerning" when speaking with reporters in Cape Town on April 16, according to Bloomberg News. Marcus specified that his nation's central bank has no plans to alter its reserves of the metal in light of the recent price declines. 

Oleg Vyugin, who previously served as the first deputy chairman at Bank Rossii and is now the chairman of MDM Bank, told the news source via telephone that whether or not the central bank of Russia will offload gold in order to purchase other currencies is not yet clear. He predicted that it is still ambiguous "how the crisis that started in 2008 will end," and that there is a high chance that the appropriate officials will keep purchasing the metal. 

The Bank of Korea referred to the short-term price fluctuations that the commodity is experiencing as an "unavoidable risk" and described the recent depreciation in the precious metal as being "not a big concern," as its holdings of the metal are merely one component of a broader risk management strategy, according to Bloomberg. 

Global economic direction
Gerald Panneton, president and chief executive officer of Toronto-based firm Detour Gold Corp. (DGC), stated at a conference in Zurich that the most important question that everyone is asking is whether or not the economy is "back on track," Bloomberg News reports. 

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