Sri Lanka's banks and finance companies are also exposed to gold-backed loans given during the bubble. Finance companies, which are more aggressive have generally given a larger percentage on credit than banks, analysts say.
Update II In 2012 Sri Lanka's central bank was a net seller by more than four tonnes in January and February when gold prices rose above 1750 dollars an ounce and was a net buyer in May and June when prices fell to as much as 1585 dollars an ounce.
In December 2012 however Sri Lanka was a net buyer by 9.8 tonnes of gold when gold prices were around 1660 dollars an ounce.
Finance minister Sarath Amunugama replying opposition legislator Ravi Karunanayake in parliament in June said that the Central Bank ended the year with 13.62 tonnes of gold after buying 23.69 tonnes of gold and selling 20.
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The Central Bank traded gold with HSBC Bank London, UBS Zurich, JPMorgan Chase Bank, Credit Suisse International, Bank for International Settlements, Merrill Lynch International Bank, Bank of Nova Scotia, Standard Chartered Bank, ANZ Bank, Toronto-Dominion Bank and Deutsche Bank, he said.
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The year-end stock was up 3.64 tonnes was valued at 727 million US dollars or about 1660 dollars an ounce.
Since the gold crashed to about 1200 dollars an ounce by end June and has recovered to about 1280 dollars an ounce.
In the first quarter Sri Lanka's Central Bank had bought about a tonne of gold a month and had 16.6 tonnes of gold according to data released by World Gold Council, an industry body which worth about 688 million US dollars at a price of 1290 dollars an ounce.
The Central Bank said there were about 312 million US dollars in marked-to-market losses in cross-currency movements and gold by May, when forex reserves dropped by about 200 million US dollars to 6.6 billion US dollars.
Gold prices generally go up when the US Federal Reserve prints money, destroys the intrinsic value of the dollars and generates global inflation.
Before Federal Reserve was created gold was just 22 dollars an ounce and there was no permanent inflation in the US or world.
Gold prices (and other precious metals, base metals, oil and food commodities) can fall when US monetary policy is better and credit growth is slow or negative.
Bursting credit bubbles are usually accompanied by deflation but following the 2008 bubble and bank run, though gold fell from 1,300 dollars to around 850 unprecedented Fed money printing pushed prices back up.