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Gold Near Two-Week High on Speculation Central Banks May Buy

Dec. 29 (Bloomberg) -- Gold traded near its highest level in two weeks on speculation central banks, the biggest holders of the metal, may buy more bullion to diversify their reserves.

The precious metal has risen 4.9 percent in the last seven days, helped by buying from jewelers and investors concerned over inflation, the U.S. budget and current account deficits and currency values, according to analysts and traders.

China should increase its gold holdings to 2,500 tons from 600 tons, China Galaxy Securities economist Teng Tai said in a report from the official Xinhua News Agency on Dec. 26. Other Chinese economists believe it is not a proper time to buy with such high prices, the agency said.

``Prices are rising on tight supplies and the possibility central banks may increase their holdings,'' Song Won Deog, head of Woori Futures Co.'s overseas futures team, said by phone in Seoul. ``Trading itself is thin at this time of year, so prices are volatile.''

Gold for immediate delivery rose as much as $1, or 0.2 percent, to $517.60 an ounce, the highest since Dec. 14. It traded at $516.08 at 11:14 a.m. Seoul time. The metal reached a 24-year high of $541 on Dec. 12.

Chinese jewelers may also be considering purchases before the Lunar New Year celebrations at the end of January, said James Moore, a precious metals analyst at the BullionDesk.com, in an e-mailed report.

Reserves

Increasing gold reserves to 2,500 tons would make China the world's fifth-biggest holder of gold, behind the U.S., Germany, the International Monetary Fund and France. It is now the 10th- largest holder, the producer-funded World Gold Council says.

Russia's central bank said in November it may double its gold reserves. South Africa and Argentina have also said they may increase holdings. Central banks, mainly in the U.S. and Europe, hold almost a fifth of the world's gold supply as a reserve asset.

``There does seem to be that speculation, and that's helping drive the Japanese trade,'' Jonathan Barratt, head of foreign exchange and precious metals at Tricom Futures Pty, said in Sydney. ``The market is thinly traded and it's more market sentiment than anything.''

Gold for delivery in December 2006 rose as much as 48 yen, or 2.5 percent, to 1,988 yen a gram on the Tokyo Commodity Exchange. The contract traded at 1,976 yen at 11 a.m. Tokyo time.

Gold for delivery in February rose as much as $3.40, or 0.7 percent, to $519.70 an ounce in after-hours trading on the Comex division of the New York Mercantile Exchange. It traded at $517.70 at 1:30 p.m. Sydney time.

A futures contract is an obligation to sell or buy a commodity at a set price by a specific date.

To contact the reporter on this story:
Meeyoung Song in Seoul at [email protected];
Tan Hwee Ann in Melbourne at [email protected];

Last Updated: December 28, 2005 21:43 EST

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