By GREG ANSLEY
CANBERRA - Central banks remain the great unknown in the international gold market despite Europe's en-masse promise last year to limit sales and lending of its reserves.
September's announcement by the 15 European banks of an annual cap of 400 tonnes on combined gold sales for five years helped to calm nerves in what had become a nail-biting market.
Gold hovered for most of last year at an average $US279 an ounce - the lowest average since 1972 - following a three-year panic over the metal's role as a national reserve.
This year, the Australian Bureau of Agricultural and Resource Economics (Abare) predicts, the price of gold will increase 7.5 per cent to an average $US300 an ounce, and possibly rising to as high as $US315.
But in a cautious analysis to the annual Outlook commodity forecasting conference in Canberra, Abare senior research officer Michael Evans warns the central banks remain as a sobering question mark.
He says the 20-year slide in the percentage of gold held as reserves in central banks was expected to continue indefinitely as the banks eyed declining long-term price trends.
Enhanced by low inflation, the sale of gold stocks and their replacement by interest-bearing financial instruments denominated in a range of currencies had become more appealing.
And the European cap on sales and lending of their reserves still leaves a historically significant amount of gold potentially on the market.
The 400-tonne limit - likely to be fully used - is well above the net annual average of 300 tonnes sold by the official sector in the past decade, and more than twice the amount averaged by European central banks over the period.
Nor does the uncertainty end there: because the Europeans have said the policy is to be reviewed in 2004, nerves could again play havoc with the market as the deadline nears.
Even greater uncertainty, according to Mr Evans, could come from the lending policies of the world's central banks.
At the end of last year they had about 4600 tonnes outstanding in loans, about three-quarters of which was used for producer hedging and the rest for fabrication or borrowed by other banks.
About half of these loans came from the developing world's central banks, many of which have reached their lending limits and cannot add much more to net hedging in the medium term.
The amount of gold still available for lending to the market is unclear.
Mr Evans says that much of the 30,000 tonnes held by central banks has been kept off the loans market by the European cap and lending policies of the United States and large central banks.
But while the Europeans and the US hold about 80 per cent of the world's official gold reserves, about 6000 tonnes is still potentially available for lending.
Even if half of this amount is already lent, Mr Evans says, there is potential for net lending to increase by several hundred tonnes a year.
"Any reluctance by central bankers to increase net lending over the medium term will place significant upward pressure on gold prices," he says.
On balance, Mr Evans expects that small returns on lending will maintain net lending at present high levels and limit gold price rises over the medium term.
Attitude of banks 'key to gold price rises'
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