Gold at 12-Year Low on Swiss Sales Plan

Gold fell on Friday to its lowest price in 12 years, in reaction to a Swiss proposal to sell almost half its gold reserves, a development that heightened expectations of a further wave of central bank gold sales that could depress prices further.

Gold prices also are being hurt by the currency and stock market turmoil in Southeast Asia, which have sparked fears that Asian investors may sell some of their holdings in the precious metal.

The price dropped sharply on the New York Mercantile Exchange, with the spot month contract closing at $307.30, off $15.70.

It was the lowest price for gold since December 1985, when it was trading for about $285 an ounce.

In inflation-adjusted terms, gold prices are at their lowest levels since the 1970s, analysts said.

The sell-off followed news reports that the Swiss finance ministry and the Swiss National Bank approved a plan to sell up to 1,400 metric tons from the Swiss gold reserve, which totals about 2,600 tons.

The proposal, which must be approved by a nationwide referendum set for next year, is part of a plan to overhaul the Swiss Constitution to reduce the amount of gold that must be held by law to back the Swiss franc. The gold sales would help finance a fund to aid Holocaust victims and others.

The proposal was taken by investors and traders as another sign that the world’s central banks and governments don’t regard gold as a cornerstone of the monetary system anymore.

“This is another nail in the coffin in the idea that gold is a key monetary asset for central banks,” said Kamal Naqvi, a precious metals analyst at securities house Macquarie Equities Ltd. in London. “It encourages investment funds to say, ‘Enough is enough. Let’s sell out of gold because it doesn’t have a future for the next two or three years.’ ”

South Africa’s central bank said the announcement from Switzerland, which has the fifth-largest gold reserves--after the U.S., Germany, France and Italy--was bad news for gold.

The Swiss proposal is symbolic because the Swiss central bank is regarded as one of the most conservative in the world. When the Swiss authorities first suggested that they might sell some gold in March, UBS Ltd. gold analyst Andy Smith described it as a “breathtaking conversion of the cornerstone of central bank conservatism.”

Gold has been a dismal investment in the last few years. A central bank investing in 30-year U.S. Treasury bonds in the last five years would have a 48% gain, assuming interest payments were reinvested at current rates. If it bought gold five years ago, it would have lost 5.2%.

“Holders of gold are having a difficult time, and it looks as if times are going to get tougher if the Swiss do this kind of thing,” said Peter Harman, who manages the Waverley Australasian Gold Fund in London.

Gold prices have also fallen because of sagging demand for the precious metal in Southeast Asia, due to recent declines in the region’s currencies and stock markets.

A slide in currencies such as the Thai baht, the Malaysian ringgit and the Indonesian rupiah has made U.S. dollar-priced gold much more expensive for consumers in those countries. Lower stock prices have forced some investors to sell other assets, such as gold, to cover their losses.

“The timing of the Swiss news is pretty unfortunate because of all the volatility in the stock markets in Asia,” said Steve Briggs, a commodities analyst at stockbrokers E.W. Balderson & Co. in Johannesburg, South Africa. “People are liquidating their gold assets to pay for losses on the stock markets, and the slump is a combination of both things.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Tarnished

Gold plunged to a 12-year low Friday, Monthly spot closes and most recent on the New York Mercantile:

Friday close: $307.30

Source: Bloomberg News