CENTRAL BANKS SUCCUMB AGAIN TO BULLION\'S LURE

Ten years ago today the UK Treasury sent gold prices tumbling when it announced it would sell a chunk of its gold reserves.

In a matter of weeks prices plunged to a 22-year low of $250 a troy ounce and, over the course of that year, central banks from Australia and Switzerland to the Netherlands announced plans to sell a large slice of their bullion.

“There was a feeling that countries were racing each other to sell their bullion,” says Jonathan Spall, director of commodities at Barclays Capital in London and an expert on central banks' gold activity.

A decade later the picture looks different – sales in Europe have slowed to a crawl and fresh demand is emerging elsewhere.

The clearest sign of the new trend is Beijing's announcement that it has secretively almost doubled its gold reserves to become the world's fifth-biggest holder of the metal. Central banks in countries including Russia, Venezuela, Mexico and the Philippines are also buying gold, albeit in small amounts.

Meanwhile, bullion prices have bounced back, to trade close to an all-time high of $900-$1,000 as concerns about the weakness of the US dollar and the financial crisis have sent investors rushing to the safety of the metal.

The change is partly the result of a natural end to Europe's large sales after years of strong disposals, says John Reade, a precious metal strategist at UBS in London.

But it also reflects fresh interest from official sectors elsewhere. “There is clear evidence among some emerging countries, notably Russia and China, that they want to build up their gold reserves,” he says.

The shift is important for the gold market on two fronts: the interest provides psychological support and, more importantly, has reduced a source of supply. Last year central banks sold 246 tonnes, which, although the lowest amount in 10 years, was equal to 10 per cent of global mined gold.

China is expected to keep buying the metal quietly to diversify its foreign reserves, gold industry sources in China believe. Beijing's exact gold purchasing intentions are not known, but industry analysts are betting on more purchases, as it has made no secret of a wish to diversify foreign reserves away from the dollar. Although gold is quoted in dollars, its price usually rises when the US currency weakens.

“I'm absolutely sure that they will continue buying because China's gold holdings are very small in terms of the size of its economy and the growing significance of its currency,” says Paul Atherley, managing director of Leyshon Resources in China.

China's current gold reserves represent only about 1.6 per cent of total foreign reserves, a vastly smaller percentage than the global average of 10.5 per cent