Sunday Times (Sri Lanka)

Gold prices hit all- time high, decline in reserves


Sri Lanka’s gold prices reached a new high lowering the demand of gold jewellery in the backdrop of a decline in the country’s gold reserves, underpinne­d by unease over mounting Coronaviru­s cases globally, official sources said.

Upon a thorough analysis on the internatio­nal best practices and the nature of gold as a reserve asset, the Central Bank ( CB) has decided to reduce the gold holding to 3 to 5 per cent of the foreign reserves until gold prices rise to appropriat­e levels with a continuous monitoring in the market, a CB senior official said.

The CB’s longstandi­ng gold holding of 15 to 20 per cent over the last decade had proven to be an over- allocation. The most detrimenta­l factor in over allocation is that gold happens to be a non- income bearing asset for a substantia­lly longer period as the demand for safe haven assets like gold had deteriorat­ed with the recovery of the global financial crisis, he added.

Therefore, the problem that CB could not sell those reserves was because prices were coming down and they cannot sell at a loss. So, as a result, whenever the gold prices are coming back again, the Monetary Board had to take a decision that they would bring the level of gold in CB’s compositio­n to a much more prudent level of approximat­ely 5 per cent, he pointed out.

The price of one sovereign of 24 karat gold in Sri Lanka has skyrockete­d to Rs. 100,000 and a sovereign of 22 karat gold in Sri Lanka is priced at Rs. 93,000 at present. The sudden hike in the prices in the local market is as a result of the price of an ounce of gold in the global market exceeding US$1800.

Gold reserves in Sri Lanka fell 6.70 tonnes in the first quarter of 2020 from 19.66 tonnes in the fourth quarter of 2019. As gold prices increased last week, gold reserves of the CB have dropped by almost $600 million this year.

CB data shows that on 31 December 2019, there was $ 954.88 million worth of gold reserves held by Sri Lanka. By 29 May 2020, gold reserves had plummeted to $ 372.7 million, a reduction of $582 million in a span of six months.

The jewellery industry is also concerned about the economic set back, job and pay cuts that could hit demand even after the curfew is lifted. Sri Lankans buy gold jewellery with disposable income, which has fallen to very low levels as a result of pay cuts of employees and reduction of income of self- employed and businessme­n, a spokesman for the Jewellers Associatio­n told the Business Times. (BS)

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