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European central banks cut sales of gold

Section: Daily Dispatches

By Javier Blas
Financial Times, London
Sunday, September 28, 2008

KYOTO, Japan -- European central banks have cut their sales of gold to the lowest level in almost a decade, reversing the practice of recent years when hefty sales helped depress prices.

Institutions bound by the Central Bank Gold Agreement -- the banks of the eurozone plus Sweden and Switzerland -- sold about 343 tonnes of gold in the year that expired on Friday, the lowest amount since the first CBGA was signed in 1999.

This compares with 475.8 tonnes in the year to the end of September 2007. Under the agreement, the banks are allowed to sell up to 500 tonnes of gold each year.

The European trend is part of a global movement of reduced central bank selling and increased investor buying that is helping to underpin high prices at a time of turmoil in financial markets.

GFMS, the precious metals consultancy, estimates global central banks will sell 269 tonnes of bullion in 2008, the lowest since 1995.

Much of the selling by European banks took place between October and December last year.

As central banks sell less, investors are rushing into bullion-backed exchange traded funds to such an extent that some analysts refer to the ETFs as the "people's central bank" because they are now bigger than most countries' official reserves.

Bullion ETF holdings reached a record 1,056.7 tonnes --– or more than $30 billion -- on Friday, up 33 per cent in the past 12 months and double the 2006 level.

The developments provide a bullish backdrop to the annual meeting of the London Bullion Market Association, which begins Monday in Kyoto.

"Less central bank selling sends a strong bullish signal to the market," said Philip Klapwijk, GFMS chairman.

"The investors' bullion buying will be sustained for the time being if people continue to be concerned about financial system stability."

Gold prices surged last week to $911 a troy ounce, up more than 20 per cent from the level before the collapse of Lehman Brothers but below the high set last March at $1,030.80. Bullion closed at $885 an ounce on Friday.

Kamal Naqvi, head of commodity hedge fund sales at Credit Suisse, said: "We are witnessing strong buying of bullion as financial risks have increased."

Along with investors, some central banks that have sold gold are reviewing their position.

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