Gold surges as banks restrict level of sales

Gold surged six per cent to five-month highs yesterday after European central banks said they would restrict bullion sales for the next five years.

Gold stopped a strong overnight run just short of $285 a troy ounce, leaving August's 20-year lows far behind and staking out $300 an ounce as its next target.

Gold-mining shares in Australia, South Africa and Great Britain also powered higher after the 15 central banks said they would cap annual gold sales at 400 tonnes.

The five-year, 2,000-tonne total is just enough to satisfy world demand for six months. Market worries that many more central banks would sell gold as global inflation eased had driven the price down from an early 1996 peak of $418.

"This particular announcement is such a significant change in policy it's going to provide [price] support," said Mr Bob Beasley, a technical analyst at Barclays Capital.

In one move, the European Central Bank announcement late on Sunday reshaped the troubled outlook for bullion. It had seemed destined for more sharp losses after it plumbed 20-year lows when Britain announced sales of some 58 per cent of its reserves in May.

But one by one, the official threats to the market - huge gold sales by the International Monetary Fund, the Swiss National Bank, and other central banks - have fallen away amid cries from mining nations that the sales, meant in part to finance relief programmes, would hurt them by hitting prices.

Together, the European Central Bank, the 11 national central banks in the euro zone, as well as the Swedish, Swiss and British central banks, control about half the world's official gold reserves.

Their decision effectively removed any lingering fears of major official sales.

"I think we will see $300 gold this year. It may come slowly, it may come quickly. I think we are in a new environment for gold now," said Chase Manhattan precious metals analyst, Mr Martin Fraenkel.

Other key holders of gold reserves do not plan sales. The world's largest holder is the United States, with 8,139 tonnes, which has not proposed selling reserves. It is followed by Germany with some 3,500 tonnes and the IMF with 3,200.