It is a trend that is catching on. First China bought gold from the International Monetary Fund, then it was the turn of India.  Now, Sri Lanka has jumped onto the bandwagon.

Countries are buying gold like there is no tomorrow.

Sri Lanka's central bank said it had been buying gold to diversify its reserves amid volatile currency markets, days after India announced it had purchased 200 tonnes of the precious metal, by doling out hard cash.

We have been observing that prices of gold have been going up so we have been strategically buying gold over the past several months as part of a reserve management process of diversifying our portfolio, Central Bank assistant governor Nandalal Weerasinghe told newswire AFP.

Weerasinghe did not disclose from which sources the bank was buying the gold or at what prices. He gave no breakdown of how much of the country's more than five-billion-dollars in foreign reserves were held in gold.

Political move?

The Sri Lankan bank's gold purchase comments coincided with a separate bank announcement that the release of a second tranche of an IMF bailout had pushed its foreign reserves to a record high of over five billion dollars.

The gross official international reserves of the country, which has already exceeded 4.8 billion dollars, will surpass five billion dollar mark with the receipt of the IMF 329.4 million dollars, the central bank statement said.

The IMF gave the bailout package to Sri Lanka in July, after the nation's reserves slumped to just over one billion dollars, as security forces pushed ahead with their final offensive to crush separatist Tamil Tiger rebels.

But the moot question remains - what ails these Asian tigers?

Melting dollar

Gold prices are a powerful indicator of national trust in world currencies. As confidence in national currencies increases, the price of gold falls. Similarly, when the price of gold increases, confidence in national currencies falls.

As confidence in the US dollar declines, other nations are increasing their gold holdings and using them to replace their stock of US dollars.

Last week, India purchased 200 tons of gold from the International Monetary Fund. This, despite the fact that gold was selling at a near all-time high. The transaction was worth almost US$ 7 billion. The move set alarm bells ringing.

Why now?

If one goes back a bit, back in June, Bill Gross, the founder of PIMCO, the world's largest mutual fund company and widely noted as one of the savviest investors in the world, asked investors to get out of the dollar before the central banks did. Now central banks around the world are doing exactly that.

Central banks have begun getting out of dollars. And piling into gold.

The fall in the US dollar seems to be pushing all the central banks to strengthen their portfolio with gold, said N R Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. Gold is a safe store of value compared to the US dollar.

Over the past year, central banks, which have been net sellers of gold are now a new and increasingly important source of demand, the World Gold Council's chief executive Aram Shishmanian said in a council's statement. This...demonstrates that many central banks are reassessing their reserve asset management policies.

Added Krishna Reddy, a precious metal analyst at Way2Wealth Commodities Pvt, to Bloomberg: There seems to be consensus among the central banks that it's better to cut down on currency holdings and diversify into assets like gold, which has upside potential,

China powers

China, the world's biggest gold producer, is said to have increased reserves of the metal by 76 per cent to 1,054 tons since 2003 and has the fifth-biggest holdings by country, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in April.

Not only is the country buying all the gold that they can without pushing the price up, say analysts, but they are also encouraging the Chinese people via the media to buy gold and silver.

China is clearly worried its massive holdings of US dollars are at risk of devaluation, with the Obama administration projecting trillion-dollar deficits into the foreseeable future.

Incidentally, Chinese government officials who would normally prefer to remain on the sidelines have recently become more vociferous about the total mismanagement of the US economy and the US dollar.

China is now openly criticising US monetary policy. The former vice-chairman of the Standing Committee, Cheng Siwei, noted in a report in the Telegraph, that China is dismayed by the Fed's credit easing.

Cheng said: If they keep printing money to buy bonds it will lead to inflation and after a year or two the dollar will fall hard.

As the race to debase currencies picks up steam, it dramatically reduces China's wealth further. China is starting to realize they will be left holding the bag for the entire world as all the countries openly continue the race to debase.

The message though, is on the wall - China with its $2 trillion of reserves and with a population of 1.3 trillion are major buyers of gold and silver.

More sales

Russia, China and Brazil are also said to be lining up to buy the rest of the IMF gold for sale, according to Moore from the TheBullionDesk.com.

Historically, nations do not tend to buy massive amounts of gold when it is at or near all time highs. Taiwan is also a major holder of gold.

If these emerging nations decide to make gold an important piece of their foreign exchange reserves, as is the case with the developed world, then the gold price could make new highs that would surprise even the most bullish analysts, traders maintain.

Does this mean the gold price is underwritten for some time to come? Do the governments of these countries expect the US dollar to weaken further?  And if so, which way is gold headed?

Predictions on how high gold can go vary; at the bullish end of the scale, François Mouté, Europe's top US equity manager, believes it will hit $1,600.

Chris Mayer, who has been way ahead of the curve throughout the gold bull market of the last few years, has guided his subscribers to many large gains in the gold mining sector. Sure, gold may be a little overbought over the short term, Chris admits, but we're still in the middle of a great big bull market that is not even close to exhausting itself.

All bull?

Could this point to something else altogether? Something that is missing completely from most analysts radar?

Over the past few years, a confluence of factors has aligned to create a bullish environment for the gold price. Negative real interest rates, poor rates of return on alternative asset classes, unprecedented government stimulus, rising sovereign deficits and debt loads, and quantitative easing have all combined to drive investors across the globe to seek a safe haven in gold-related investments.

Incidentally, November is earmarked as a potential point for gold to spike in dollar terms, driven by a flood of money moving out of hedge funds.

Point to note though: Developing economies need to diversify their reserves. Buying gold enables them to have a bigger say at IMF and other such organizations. It puts more weight behind their words.

Isn't the recent move of Asian countries buying gold a mere geo-political move rather than desirability of gold?

Is it time to cash out on gold?