Treasury is lucky beneficiary of soaring gold price

Bullion markets
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The Independent Online

The UK government pressed ahead with a pre-planned auction of gold reserves yesterday, becoming an accidental beneficiary of the turbulence on the financial markets.

The Bank of England sold 20 tonnes, or 644,000 ounces, of the metal at $280 an ounce, netting $180.5m (£124.4m).

The price of gold had surged as much as 6 per cent, or $16, to $287 on Tuesday in the wake of terrorist attacks as investors sold shares and sought safer investments. A spokesman at the Treasury said the market had welcomed the decision not to pull the auction.

"The objective is to stick to business as usual," he said. "The markets are slightly volatile in the light of all that has happened and it would have been counter-productive to do something like that."

The gold price ended trading yesterday at $279, having given up half of Tuesday's surge from $271 to $287.

Rhona O'Connell, an analyst for the World Gold Council, said the auction had been a success "especially given market nervousness".

Bullion dealers said the market was still confused after Tuesday's attacks, which had prompted some investors to buy gold, traditionally seen as a safe haven in times of crisis.

One trader said the market was still coming to grips with Tuesday's extraordinary events. "People want to tidy up their positions today and find out about friends and colleagues," he said.

Ms O'Connell said Tuesday's spike in the gold price was not surprising. "Security upsets have generated similar reactions before, such as the Gulf War," she said.

Economists said the surge in the gold price was reflected in a general move away from high-risk securities and towards safer assets.

This has seen fund managers selling shares, triggering the sharp drops on world stock markets, into bonds.

"On the currency markets the dollar has been hit hard and a flight to safety has led the euro, yen and pound to make gains," said Michael Derks, chief international strategist at the Commonwealth Bank of Australia.

However, Ms O'Connell said the belief that gold always soars in times of crisis was "misconceived". "Its role as a hedge against risk means it tends to be bought in anticipation of a problem and then sold if a crisis materialises," she said.

That meant the price was likely to stay around its current levels while the outlook was still uncertain, traders said.

Market players were waiting for any possible retaliation by the US government against the attackers and for the reopening of the US markets, they added.

"It's just a case of waiting and seeing ... a lot of liquidity has been taken out of the market because there is no trade in the US now," said a trader. "I think it will return over time and I don't see any major problems over the next few days."