Peter Hambro, one of the leading figures in Britain’s gold mining sector, has criticised hedge funds for distorting the market for gold and warned that there is potential for “disaster” in the industry.
Mr Hambro, co-founder and chairman of Russian gold miner Petropavlovsk, made the comment in an interview in The Sunday Telegraph.
The gold price, fixed at $1,376.12 per troy ounce in London on Friday, has fallen more than 30pc from a 2011 peak of more than $1,900.
Figures from the World Gold Council last week showed that ownership of the world’s gold shifted further East during the first half of 2013.
Overall demand for gold was 12pc lower in the three months to the end of June than in the comparable period for 2012, as Westerners dumped their exchange-traded holdings and Asian consumers responded to lower prices by adding to their hoards of jewellery and bullion.
“It’s rather odd,” said Mr Hambro, “Gold is streaming into the Far East. Russians are still buying; the Chinese are buying. There’s no secret. It’s in the international statistics.
“Where the selling came from that knocked the gold price down, I really don’t know. It was such a very strange thing.
“I’ve been in the gold business for 35 years and never known a big change like that where it wasn’t obvious where it came from.”
Asked whether he is concerned that hedge funds are distorting the market, he said: “The quantity of gold available for delivery on the Commodities Exchange in New York is at its lowest level ever.
“The size of the contracts is at its highest, but the deliverable is at its lowest. There is the potential for disaster in those numbers.”
“Fractional reserve banking in gold is responsible for a lot of the strange things going on. You can set yourself up as a hedge fund and nobody knows who you are.
“Because of these strange machinations and the distortion between the physical market and the paper market, it’s very hard to say what’s going to happen.
“There’s a real risk that the people who’ve sold 'paper gold’ won’t be able to deliver and there will be some official ruling that will settle all the bargains at today’s price. Something like that will happen.”
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Petropavlovsk, set up as Peter Hambro Mining in 1994, is now the second-largest producer of gold in Russia, the world’s fourth-biggest producer.
Before the gold price slumped again earlier this year, the company locked in half its production for just over a year at $1,640 an ounce and is now hedged against gold price movements until next July.
The company is in the midst of a major cost-cutting programme aimed at reducing the $1.2bn of net debt it had in March to less than $1bn by the year-end.
Petropavlovsk shares have fallen by 75pc over the past six months, while the company is the most shorted stock in the FTSE All-share index.
The shares closed up 22pc at 119.5p on Friday, valuing Petropavlovsk at £223m. Mr Hambro has a 4.62pc stake.