Gold buying by central banks may send a signal to sell

Central banks, holding about 18 percent of all gold ever mined, are expanding their reserves for the first time in a generation as a nine-year bull market drives prices to a record.

The banks will buy 13.8 million ounces (429 metric tons) this year, worth US$15.5 billion, for the first net expansion in reserves since 1988, New York-based researcher CPM Group estimates. Gold fell 15 percent that year and took another 15 years to trade again at the same price as central banks from Switzerland to the UK cut their holdings.

India, China and Russia are now adding to reserves as gold nears its longest winning streak since at least 1948. They're joining a rush as investors in exchange-traded funds amass holdings to rival the biggest central banks. Clive Capital LLC, manager of the biggest commodities hedge fund, had its best return since May last month, led by gains in precious metals.

“This is late in the game to be buying gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and former economic adviser to the U.S. government. “Central banks are not known for their investment acumen. What it reflects is a lack of confidence in the U.S. economy and the long-term durability of the dollar as a store of value.”

Countries were also increasing their holdings in 1980 when gold peaked at US$850 an ounce, data compiled by the London-based World Gold Council show. The record was exceeded 28 years later.

They sold a net 4,880 tons since 1999, as prices tumbled to a 20-year low of US$251.95 an ounce, according to estimates from London-based researcher GFMS Ltd. Prices began to recover in 2001, reaching a record US$1,226.56 on Dec. 3 and trading Wednesday at US$1,124.44 at 2 p.m. in Singapore.

This year's 5.4 percent slump in the U.S. Dollar Index, a measure against six counterparts, is increasing the appetite for bullion. While gold and the dollar are traditional stores of value in times of economic stress, the U.S. currency proved no refuge as the Federal Reserve more than doubled its balance sheet to US$2.19 trillion in 15 months.

The dollar's share of global currency reserves fell to a decade low of 62.8 percent in the second quarter, the International Monetary Fund said Sept. 30.

India bought 200 tons from the IMF in October, the Washington-based lender said. It was the biggest single central- bank purchase in at least 30 years over such a short period, according to Timothy Green, author of “The Ages of Gold.”

Gold has jumped 27 percent this year in dollars and yuan, 31 percent in rubles and 22 percent in euros as investors sought to diversify their holdings amid the worst global recession since World War II. Governments spent at least US$12 trillion to lift their economies out of the slump.

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