Third Gold Sales Pact to Plant Flag of Support

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"Gold bugs are tantalized by the prospect of a third European central bank pact to limit sales of the precious metal..."

Gold bugs are tantalized by the prospect of a third European central bank pact to limit sales of the precious metal, with the International Monetary Fund seen figuring heavily in a move that should underpin the investment case for bullion.

European central banks have agreed to regulate gold sales under the terms of two successive Central Bank Gold Sales Agreements (CBGA) starting in 1999, which have been key in supporting an eight-year bull market rally that saw prices top the $1,000 an ounce mark .

After months of uncertainty and dwindling yearly sales under the second CBGA, European Central Bank governing council member Nout Wellink stunned gold players on Tuesday by saying the bank intended to renew the pact, which is due to expire on Sept. 26.

"Wellink's comment is the first indication that there will be a third agreement," said James Steel, an analyst at HSBC in New York. "The odds favour that because of the potential IMF sales, which they have stated would be done within the CBGA."

The IMF's potential disposal of 403.3 tons of gold, approved last year to beef up its financing firepower for troubled economies, has added a new ingredient to the mix of official sector sales along with China's shock announcement last week detailing significant bullion buying since 2003.

While the fund is not currently a signatory of the pact, it has stated it wants to make its gold sales under the umbrella of a wider agreement to avoid upsetting the market.

"I think that the current signatories would probably prefer to keep the signatories to the agreement to European central banks and the IMF doesn't qualify as one of those," said George Milling-Stanley, managing director of official sector at The World Gold Council.

"The consensus in the market would be that probably some form of association rather than the IMF becoming a formal signatory would be sufficient," he added.

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