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Gold price drop divides opinions, hits central banks

Published: Updated:

The dramatic drop in Gold prices this week has surprised investors and divided experts on whether Gold has lost its status as a safe haven investment. It also thought to have wiped out billions of dollars from central bank reserves.

Some analysts say Gold has proven to be a sound investment over centuries, regardless of recent price movements.

“Gold has proven itself as a store of value over thousands of years, Jan Skoyles Head of Research at The Real Asset Co told Al Arabiya. “I personally don’t think the bull market had ended.”

But traders say, in the short term, investors are likely to stay away.

“I think for the short term, the bull market is definitely over, I don’t think we are going see a bounce back or buying, I think we’re going to see continued selling,” Joe Rundle, Head of Trading, ETX Capital told Al Arabiya.

Gold prices saw their biggest fall in more than thirty years earlier this week after investors shunned the metal in favour of other riskier assets with higher returns.

Recent data shows more than $11 billion flowed out of Gold Funds this year, the highest rate since 2011. While investment demand for gold was down 8% last year, according to the World Gold Council.

“Traders use this as a hedge, a protection, a safe haven in times of financial volatility and that has gone away; it’s been completely eroded by two days’ moves and retail traders will not be getting into this product in a hurry,” Rundle said.

But others say the economic fundamentals haven’t changed and Gold is still an attractive investment.

“Despite what’s just happened over the past few days, Central Banks remain net buyers of Gold, we’ve seen central banks in Sri Lanka and South Korean saying this is a buying opportunity. Personally, in the company I work for our clients are now net buyers of gold,” Skoyles told Al Arabiya.

Demand from Central Banks remains strong with global central banks buying more than 500 tonnes of Gold last year, the highest amount in nearly 50 years.

But the drop in gold prices is estimated to have wiped out more than $500 billion from central bank reserves.

Most central banks hold a certain amount of their reserves in gold, with the United States holding the most globally. The U.S. Federal Reserve houses more than 8100 tonnes of bullion, representing more than three quarters of the country’s reserves.

The Bank of England houses 310 tonnes of solid gold bars representing 15% of reserves.

The drop in Gold prices will have hit some Arab central banks particularly hard. In Lebanon gold represents nearly a third of total central bank reserves and Egypt holds a quarter of foreign reserves in gold.

In Egypt, foreign reserves have already plummeted to the dangerously low level of $13.4 billion, but that figure could be significantly lower because of the decline in gold prices.

Egypt holds 2.4 million ounces (75.6 tonnes) of Gold according to the World Gold Council data. The plunge in Gold will have wiped out more than $500 million of the dollar value of Egypt’s reserves since the beginning of April, according to Cairo-based Pharos research.

The events of the past week have left some wondering if Gold’s decade long rally has finally come to an end.

“In the next coming months, we’re going to see a drift down in Gold and possibly selling, maybe down to the 1200 level,” Rundle said referring to the dollar price of an ounce of gold.

But Skoyles noted that one should not just look at the price of gold, but also its value.

“They are two very different things. Gold has maintained its value over thousands of years, it is the price that has dropped, it dropped in its price against other currencies, if you at the currencies priced in gold over the past decade it is actually the prices of the currencies which have declined dramatically,” she said.

For all the losses some investors may have suffered, the drop in prices has proved to be a boom for gold traders, sparking a buying frenzy across Asia. In China, Mumbai and Hong Kong shoppers have snapped up all sorts of jewellery at discounted prices.