Gold slumps to fresh low

The price of gold fell almost $8 to $324.50 an ounce yesterday, its lowest level since December 1985, in reaction to news that the Australian central bank had sold 167 tonnes of gold, two-thirds of its entire stock, over the past six months to swell its interest-earning foreign exchange reserves.

The Australian sale is slightly smaller than the 203 tonnes the Belgian central bank sold in March last year and the 300 tonnes sold by the Netherlands in January this year. But it comes at a time when the gold price has already fallen by $50 an ounce over the last six months.

Australia is the world's third biggest gold producer and the clear inference that it has lost faith in the metal sent shock waves through bullion markets. Gold mining shares in Australia, Canada and South Africa also dropped yesterday.

Turnover on the bullion markets yesterday was relatively low because US markets were closed for Independence Day. But holding gold costs central banks alone an estimated $15bn (pounds 8.9bn) a year in lost interest. Several more central banks are thought to be considering selling gold reserves now that inflation appears to be under control. Some bullion market analysts are suggesting that the price could fall below $300 an ounce.

The setback comes at a time when South African gold mining companies are preparing next week to announce overall net losses for the second quarter of the year. Australian gold mines are also losing money. The average cost of producing an ounce of gold there is $358 an ounce.

World-wide demand for gold, especially for jewellery is already greater than the amount of newly mined gold but stocks in central banks and investment holdings are ample to meet excess demand for many years.

However, some analysts believe that a steep fall in the gold price now could be the best thing for markets in the long run becasue it would stimulate demand for gold jewellery, particulary in the Far East. Demand for gold to make jewellery is already greater than purchases by central banks and the conventional investment demand for gold bars and coins.

Analysts said that there was substantial pent-up demand in China, and in India where gold jewellery remained a store of value for many rural families and an integral part of the dowry system.