Gold loses its glitter despite central banks piling in

Last year central banks bought the most gold since 1964 - just before the collapse in prices into a bear market underscored investors' weakening faith in a globally traditional store of value.

Nations from Colombia to Greece to South Africa bought gold as prices rose for an 11th year, highlighting the reversal of a three-decade-long bout of selling that diminished the world's biggest bullion hoard by 19 per cent. The London-based World Gold Council says they added 534.6 tonnes to reserves in 2012, the most in almost a half century, and it expects purchases of 450 to 550 tonnes this year.

Central banks are the biggest losers, with about US$560 billion of value erased since gold reached a record US$1,921.15 an ounce in September 2011. Gold was already in the eighth year of its longest bull market since the end of the first world war when reserves started expanding again in 2008. Central banks were also buying in 1980 when bullion peaked at the equivalent of US$2,400 in today's money, and selling in 1999 as prices slumped to a 20-year low.

"They sell at the wrong time and buy at the wrong time," said Walter Hellwig of BB&T Wealth Management in Alabama. "They are looking at it as a long-term holding, as an ultimate reserve currency. With the benefit of hindsight, they tend to get it wrong more often than not."

Gold tumbled 15 per cent to US$1,431.95 this year and entered a bear market on April 12. By the end of the next trading day, prices had slumped 14 per cent, the biggest two-day rout in three decades. Should the price of gold fail to rally by the end of the year, it would mark the first annual decline since 2000. Goldman Sachs is forecasting a price of US$1,390 in 12 months.

The timing of the rout is surprising, because the events that sustained the bull market over the past few years are still unresolved. Central banks are printing money on an unprecedented scale as they seek to boost growth, Europe's debt crisis is spreading and the International Monetary Fund is among those getting more pessimistic on the global economic outlook. Yet investors are now shunning an asset traditionally seen as a hedge against currency devaluation and financial turmoil.

Central banks owned 31,671 tonnes of gold at the end of 2012, one fifth of all the gold ever mined, the World Gold Council estimates.