Gold bulls retreat as central bank sales bite

Heavy gold sales from European central banks over the past two months have taken a toll on bullion investor sentiment, despite robust jewellery demand and as top miners say production may take a hit this year.

Prices of the precious metal have struggled this year to duplicate the double-digit growth of 2005 and 2006 even though market fundamentals were tight. Larger-than-usual government sales have flooded the market with excess supply.

Analysts said other reasons the gold market is less bullish include competition from surging stock markets, heavy sales by investment funds and a seasonal slowdown in physical buying as India's wedding season winds down.

"There have been unusually large central bank sales over the past couple of weeks, and that's weighed some pressure on the market," Bill O'Neill, co-founder of commodity consultant LOGIC Advisors said.

Over the past two months, the European Central Bank sold more than its fair share of gold to diversify holdings and to take advantage of lofty prices. The Bank of Spain sold 2.6 million ounces of gold from its reserves in March and April. The Bank of France said it had sold 105 tons of gold in 2006 and would not comment on the pace for this year.

In total, gold and gold receivables held by eurozone central banks fell by an astounding €1.46 billion since the beginning of April, ECB data showed.

The sale was consistent with the 2004 Central Bank Gold Agreement, which came into force in September 2004 and bound banks to cap total sales at 2,500 tons in the 2004 to 2009 period, compared with 2,000 tons in the previous five years.

Analysts said the huge government sales flooded the market with extra bullion supply, and also dampened buying sentiment.