Gold rose slightly yesterday as the dollar fell out the outset of the G20 Summit in London. In trading in London, gold is down some 1% this morning as risk appetite returns to markets with stocks surging internationally.

Jewellery demand and demand from consumers in India and the Middle East has fallen and scrap supply from consumers has increased significantly. Jewellery demand and particularly scrap supply is what is patronizingly called the €œdumb money€. The €œman on the street€ is selling his gold and not buying which is very bullish from a contrarian perspective.

This recent extra scrap supply has been counteracted by the continuing extremely robust demand for physical bullion and ETFs internationally. This investment demand is set to remain robust for the foreseeable future as more astute and prudent investors, savers, institutions and central banks seek to diversify and have an increased allocation to gold.

The lack of imports into India and the Middle East in recent weeks will have seen inventories depleted and will mean that they will become buyers again in the coming weeks and likely provide a solid base around the $900/oz mark.

Central bank demand is set to increase, likely significantly, in the coming months. The World Gold Council reported gold sales for January 2009. Gold reserves were increased hugely in Ecuador which bought 28.3 tonnes, Russia which bought 4.1 tonnes and Venezuela which bought 7.5 tonnes. For the month of January, central banks were net buyers of gold to the tune of 33.4 tonnes. Russia has now purchased 54.7 tonnes of gold for the 7 months from July 2008 thru January 2009.

The move by Ecuador to spend an estimated $840million on 28.4 tonnes of gold is very significant and yet has barely been reported on. The country has nearly doubled its central bank gold reserves in the past three months, according to data from the World Gold Council. Ecuador spent 5 per cent of the government€™s total estimated budget in a mere three months. Should other central banks follow Ecuador€™s example than gold will rise to much higher prices.

Another surprise buyer recently was the European Central Bank, which has been selling some of its gold reserves in recent years but suddenly reversed in January, spending nearly $100 million to buy 3.3 tonnes.

The elephant in the room remains China with its very small gold reserves - a tiny 1% of overall currency reserves. China€™s reported gold reserves have unlike all other central banks remained static at some 600 tonnes in recent years (http://en.wikipedia.org/wiki/Official_gold_reserves). And yet numerous Chinese officials have said that they are diversifying into gold. China is increasing its gold reserves but may not be reporting it to the world (unlike Gordon Brown they realize it is not wise to broadcast their intentions to the world. The Director of the People€™s Bank of China recently stated: €œReducing reliance on the dollar and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk. As a result, an increase in our country€™s gold reserves is necessary.€

If IMF gold sales ever get the go ahead from the US Congress which is doubtful in itself, the sales would be coordinated closely with CBGA signatories. Morgan Stanley€™s analysts said IMF gold sales are likely to be made €œoff-market€ to help countries with huge dollar reserves, such as China, Japan and Russia, to diversify their reserve portfolio without disrupting the currency and gold markets.

The proposed IMF gold sale (some 400 tonnes) is miniscule compared to the diversification requirements of China and the US€™ other creditor nations with their massive dollar reserves.