The World Gold Council (WGC) expects Austria - historically a significant holder of gold ­- to continue selling small amounts over the remainder of the second Central Bank Gold Agreement, after the country sold just under 38 tonnes from November 5, 2004, to end of March 2008.

The World Gold Council said in a recent Central Bank Case Study (Austria report) that Austria's central bank announced in November 2004 it would sell less gold over the duration of the second Agreement than total sales of 90 tonnes under the first.  

The Austrian central bank has sold 355 tonnes of its reserves since the beginning of its sales programme, which accounts for 54% of its initial holdings. The bank held 280 tonnes at the end of March this year, accounting for 43% of the bank's total reserves.

Although this seems high, these reserves exclude the bank's euro-denominated assets. In addition, if one considered that the gold price is at historically high levels and that a retracement to, and even below its long-term average is possible, the argument against further sales of substance is even stronger, the Austria report said.  

The WGC expects there will be sales of limited volume after the end of the current second Central Bank Gold Agreement in September next year.

The objective of the World Gold Council's case study is to examine the factors that have influenced the decisions of institutions involved in reserve management policy. 

The report said the portfolio diversification properties of gold appear to be well appreciated by the central bank as its latest annual report said gold plays a special role in the reserve management activities of the Oestereichische Nationalbank.

The bank apparently said the surge in gold prices and the depreciation of the US dollar over the past few years have clearly shown how important gold is as an instrument of portfolio diversification for a central bank. It also felt that in times of higher geopolitical tensions within and beyond Europe, investors must pay special attention to the special role of gold.  

Austria, similarly to many of its European peers, has historically been a significant holder of gold considering the country's size in terms of economy and population. In the past, the motivation behind Austria's gold reserve sales was mainly related to the size of the country's bullion reserves.

The country's gold reserves rose rapidly during the late 1950s and early 1960s from just over 90 tonnes in 1957 to over 600 tonnes by the mid-1960s. Austrian gold reserves fluctuated between 600 and 660 tonnes from the mid-1960s to the early 1990s.  

However, through the sales seen during the 1990s and sales under the two Central Bank Gold Agreements, Austrian reserves declined to its current level of about 280 tonnes at the end of 2007.

Among other factors, the general conditions of the gold market in the late 1980s and throughout the 1990s influenced the Oestereichische Nationalbank's decision to sell gold.  

The period saw the emergence of a school of thought within many central banks' reserve management teams in favour of diversifying away from large hoards of gold into higher yielding assets.

Strong growth in mine production in the 1990s and the accelerated supply from producer hedging put additional pressure on the gold price. Austria did not want to be last out the door and its relatively low gold holdings in absolute terms allowed it to reap some early mover benefits.