Bugging the gold bugs

Gold: Gold continues to develop an illustrious hedge fund fan base. George Soros, for instance, doubled his holdings during the last quarter of 2009. But, enthusiasts for the yellow metal should be perturbed by the waning interest from central banks.

Soros is in the company of hedge fund luminaries such as John Paulson, Paul Tudor Jones and David Einhorn, all of whom have recently advocated owning some of the metal for reasons including its traditional inflation-hedging role.

Admittedly, last month Soros said gold was experiencing “the ultimate bubble” — but that doesn’t have to mean he has now changed his mind and become a seller. Perhaps, though, he should consider it. An expectation that central banks would be net buyers of the metal in 2010 for the first time in 20 years was one source of support for its price.

 

The International Monetary Fund’s fund-raising gold sale initially supported that view, with India buying 200 tonnes in October — roughly half the amount the IMF aimed to sell. Hopes were high that other central banks would follow, scooping up the remainder before it ever hit the public markets.

After all, the private sale offered developing countries a rare chance to buy gold in bulk without the risk of moving the market against them. Treasury junkies such as China, Russia, Brazil and Korea all hold less than 5 per cent of their reserves in gold — under half the international average, according to Deutsche Bank.

But, only another 12 tonnes were sold, and now the IMF is set to gradually sell the rest on the open market. Publicity-shy central bankers may have disliked the transparency of the IMF sale. India’s central bank could face criticism if gold falls much below its purchase price of around $1,050 an ounce. A more plausible explanation, however, is that the mandarins simply decided to pass. The reaction in gold markets -- a modest dip and recovery -- looks too sanguine. Even after a decade of selling, central bank vaults still contain almost 30,000 tonnes of gold, nearly 40 per cent of the total stock available to investors. If central bankers aren't so keen on the yellow metal, other holders might do well to cash in while they can.