Why the gold price crash is an overreaction

Gold prices have crashed as futures fell below $1,500 per ounce. Markets are expecting Cyprus' central bank will sell €400m of its gold as part of a plan to rescue to the island's finances.

Capital Economics' Julian Jessop:

Any resulting gold sales would be trivial – perhaps just 10 tonnes in a global market where demand has been running at an annual rate of around 4,800 tonnes.

Clearly this should only become a major concern for the gold market if countries with much larger holdings were forced to sell. However, among the other troubled euro-zone members, only Italy and Portugal hold significant amounts. There would also be substantial political and legal obstacles, which may yet prevent even Cyprus from selling its gold. For a start, gold reserves are typically owned by national central banks which are forbidden (by EU Treaty) from directly financing government borrowing. But the most important barrier is simply the weight of public opinion. At most, gold might be used as collateral for some government debt (an idea being promoted by the World Gold Council). However, the chances of large outright sales are very slim.

Finally, of course, it is important not to forget the context in which gold sales are even being considered. If the crisis in the euro-zone escalates to the point where other, larger countries were desperate enough to consider selling their own gold, demand for safe havens would surely be so strong that there would be plenty of willing buyers of this gold – even at higher prices.