LONDON, 20 August 2007 — European central banks may sell the maximum agreed limit of 500 tons of gold annually in the next two years as pressure mounts to pay off public debts and cut deficits, analysts say.

Unlike last year’s gold sales of just 395.80 tons, the banks are likely to sell 500 tons this year and meet the target in the last two years of the five-year Central Bank Gold Agreement (CBGA) that ends in September 2009.

According to industry estimates, the banks have sold between 360 and 400 tons in the third year ending on Sept. 26, with Spain selling 148 tons to reinvest in higher-yielding bonds and France selling another 90.5 tons.

Gold traditionally is seen as a safe-haven asset, but yields zero or very low returns against other financial instruments.

“We expect the full, or very close to the full, 500 tons ceiling permitted under the agreement to be completed by the end of this year,” analyst John Reade at UBS Investment Bank said.

“I guess there could be other sellers...but it would be quite difficult to make the maths work without Italy or Germany selling or without France accelerating their sales over and above what they said they would do.”

Italy, the world’s fifth largest holder of official gold with 2,452 tons, is the biggest public debt in Europe in absolute terms. Its parliament recently approved a motion asking the government to try to use gold reserves to cut debt. Switzerland said it would sell 250 tons by September 2009 and use the money to increase its foreign exchange reserves.

“Italy has got the world’s third-biggest debt and for years they have been of the opinion that gold was sacrosanct,” said Peter Hillyard, head of metals sales at ANZ Investment Bank.

“But they are now saying: ‘If we have got all this debt we can perhaps pay it off by selling gold.”

The European central banks are likely to sign another pact after the end of the current agreement in 2009, analysts said.

“There will be an agreement for sure. I think there will be a bigger amount of gold to be sold and you may find some new banks coming in or some banks dropping out,” Hillyard said.

The pact was signed eight years ago to stabilize gold that was languishing below $300, partly due to frequent central bank sales. The current pact, agreed in 2004, raised the sales limit over five years to 2,500 tons from 2,000 tons.

Gold hit a 26-year high of $730 an ounce in May 2006 but was at $663 on Thursday. It has doubled in the past five years, lifting gold’s share in the reserves of central banks.

For example, Switzerland’s reserves held as gold rose to 42 percent from 33 percent in mid-2005.

The signatories to the agreement hold 12,690 tons of gold, which is 51 percent of their total reserves. Analysts said if they maintained 15 percent as a benchmark share, that would allow them to cut reserves by another 8,000 tons, spread over three more agreements.

“If central banks are interested in minimizing the impact of rumors and talk about central bank selling, they should sign a third agreement, because with the absence of such an agreement, there would be additional volatility,” Reade of UBS said.

Analysts said the pacts have supported the gold market by avoiding panic selling or wild speculation over sales. It has been good for the banks as they can easily sell in the market.

“We think the existence of the agreement is very positive because it does remove the fear from the market that there might be an uncontrolled bout of selling as there was in the late 1990s,” Jill Leyland, economic adviser to industry-funded World Gold Council, said.

Despite comparatively low gold reserves held by some Asian central banks, the appeal of gold was waning, analysts said.

“If you are a young central bank, you try to make sure that your reserves are safe,” said Michael Widmer, director of metals research at Calyon Corporate and Investment Bank. “But the more sophisticated a country gets, you see a trend toward central banks also becoming better in managing their reserves and taking into account some profit goals.”

China, for instance, holds 1.1 percent of its reserves (or 600 tons) in the form of gold. Analysts said if it wanted to invest, say, 15 percent of its reserves into gold, it would have to buy nearly a third of gold held by all central banks.

Such a buy could be counterproductive, Widmer said, since in the event of an emergency China would have trouble selling such a huge quantity.