The market value of the 13,000 to 14,000 tonnes of gold estimated to be held by European Union central banks and governments has dropped by up to $250bn (pounds 153bn) - equivalent to almost a quarter of the UK's annual gross domestic product - since gold reached an all-time peak of $850 an ounce in 1980.
Gold's decline has cut the value of the reserves to about $125bn, which is about $340 for each person living in the EU.
"There is no logical reason for any of the EU central banks to hold on to gold," said Dale Henderson, an economist with the US Federal Reserve, whose comments do not necessarily reflect Fed policy. "They would have been in a much better position if they had sold it 10 years ago and held foreign currencies instead."
With US prices last year rising at 1.7 per cent, the slowest pace since 1986, and Asia's financial crisis threatening global deflation, gold has lost much of its appeal as a hedge against inflation for both private investors and governments. Last Tuesday, it dropped to an 18-year low of $276.75 an ounce.
Yet, while Belgium and the Netherlands sold an aggregate 510 tonnes in 1996 and there may have been as-yet-undisclosed sales of as much as 500 tonnes from Europe last year, the EU's largest hoarders of the precious metal - the Germans, French and Italians - show little sign of rushing to dispose of their gold.
Their decisions are crucial for gold's prospects, as EU reserves could more than meet world demand for three years - most of going into jewellery, bars, coins and for use in the electronics industry.
"I see no reason, and the Bundesbank is making no efforts, to reduce its holdings of gold," said Guntram Palm, one of the German central bank's council members, last week. Gold reserves "were and are part of our stability- oriented philosophy".
That may be just as well, for the unleashing of a large portion of the reserves on to the market in a short space of time could lead to a collapse in the price and slash the value of the central banks' remaining holdings of the metal.
"There would be absolutely no floor to the price and it would be counter-productive," said Tony Warwick-Ching, a precious metals analyst at Flemings Global Mining Group. He said he expected there to be limited sales of perhaps 500 tonnes a year, which may eventually be co-ordinated by EU members.
The German stance is crucial, with as many as 11 of the EU's 15 members due to form a single currency, the euro, under the management of a European Central Bank from 1 January 1999.
The ECB, which is due to be set up in May this year, is expected to hold between 10 per cent and 15 per cent of its planned $55bn in reserves as gold, equivalent to only about 600 to 900 tonnes. That would leave more than 12,000 tonnes with Europe's current central banks, which will become satellites of the ECB through a European System of Central Banks.
The experience with hyperinflation in the 1920s, which helped to create the conditions for Hitler's rise to power, has given gold a special place in the German psyche. The Bundesbank currently has 3,700 tonnes of gold. "It is psychologically important for the Bundesbank to heap its gold as a safeguard for the population," said Ulrike Dennig, a specialist on Bundesbank monetary policy at the HWWA economic institute in Hamburg. "It wouldn't be very wise to sell it in the early stages of currency union."
In France, which has the world's third-largest reserves with 3,182 tonnes, there is similar loyalty to the metal. "French people are traditionally more drawn by the solidity of gold than by paper," said Herve Goulletquer, chief market economist at Credit Lyonnais. "The French who had invested in bonds and shares saw their savings wiped out during the two world wars - that leaves enduring marks."
Such arguments do not wash with other central bankers and analysts. "The idea of gold as a safe harbour, the idea that the laws of supply and demand of commodities don't apply, that's just not true," said Anil Kash-yap, professor of economics at the University of Chicago.
Eddie George, Governor of the Bank of England, said in November he would be surprised if the ECB holds much gold, as it is at the "bottom of the pile" of assets in terms of liquidity. The UK, which owns 717 tonnes, is not joining the euro initially and is unlikely to participate in the ECB reserves decision.
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