After net-selling an average of 444 tonnes of gold in the five years to 2008, central banks only offloaded a net 44 tonnes last year. In fact, after 62 tonnes of net selling in the first quarter of 2009, central banks posted three quarters of net buying. This shift may signal a "fundamental change in sentiment", says the London-based World Gold Council (WGC).

In recent years, investors had been focusing on gold supply that may come onto the market from "the official sector", says the council in its report for 2009*. But several purchases by central banks, as well as reduced supply from signatories to the Central Bank Gold Agreement, has greatly reduced such speculation, says the WGC.

Indeed, the IMF said today that it will shortly begin phase two of its open-market sale of gold, following the sale of 212 tonnes to the central banks of India (200 tonnes), Sri Lanka (10 tonnes) and Mauritius (2 tonnes) in October and November. There remain 191.3 tonnes to be sold of the approved limit of 403.3 tonnes -- one-eighth of the IMF's total holdings -- announced by the fund on September 18.

The IMF has also said: "The initiation of on-market sales does not preclude further off-market gold sales directly to interested central banks."

Given the fund's status as effectively the global 'lender of last resort', the WGC says it is imperative that the organisation continues to hold large gold reserves, in line with the IMF's public assurances to that effect.

In addition to -- and perhaps partly as a result of -- central-bank moves, the nature of gold demand changed in 2009, says the WGC report. The council cites as evidence for this the greater prominence of allocated-bullion accounts and increased activity by hedge funds and other non-traditional institutional buyers.

"These two trends appear somewhat contradictory, as the move towards allocated-bullion accounts suggests medium- to long-term holdings while the increased prominence of hedge funds and other non-traditional institutions suggests a more tactical motivation," says the report. "The build-up of long positions in the futures market was also indicative of a more tactical element in the investor market."

But even tactical buyers may be buying on strong fundamentals "that are likely to persist over the medium term", such as economic, currency and inflation uncertainty and the shift in sentiment in the central bank sector, says the WGC. (The council published a report earlier this month indicating that the gold price can signal future inflation.)

Another clear shift in the gold market last year was the huge increase in investment via exchange-traded funds. At 594.7 tonnes, ETF demand in 2009 was 85% higher than the previous year, driven largely by a record first-quarter net inflow of 465.1 tonnes.  

The report is keen to stress that support for the gold price was "broadly based" last year. Identifiable demand was down 11% from 2008 levels, but once "inferred investment" -- which represents the less visible investment flows, as well as some residual error -- is added, there was a rise in total demand of 11%. Weaker jewellery and industrial demand were offset by significantly higher levels of investment, says the WGC.

There were also compensating effects within -- as well as between -- sectors, particularly within the investment sector. Western investors (both retail and institutional) compensated for weak non-Western flows, notes the report. The only non-Western country to record positive growth in net retail investment last year was China, with total consumer demand for 2009 of 461.9 tonnes, up 7% from the previous year. The WGC has suggested that China is likely to be the main focus of gold marketers in the future.

India's gold demand fell by 33% to 480 tonnes last year from 712.6 tonnes in 2008, but it remained the biggest gold-consuming country. Thailand registered the sharpest drop in demand in Asia, with a net outflow of 0.9 tonnes, as against a net inflow of 59 tonnes in 2008. Indonesia and Vietnam were also well down on the previous year's demand, with annual falls of 39% and 37% respectively.

The move by Western retail investors into gold started in earnest in the third quarter of 2008, triggered by escalating concerns over the financial sector, says the report. Inflows reached record levels in the fourth quarter of that year, even though several major Western economies were by then showing signs of recovery.

Last year, the gold price rose by 25% and averaged $972.35 an ounce, up 12% on the 2008 average of $871.96/ounce. And the WGC expects investor support for gold in 2010 to remain "solid". It cites investors' continued desire for portfolio diversification; ongoing economic, inflationary and exchange rate uncertainty; and recovering jewellery and industrial demand, as the global economy picks up.

The WGC was formed and is funded by gold-mining companies with the aim of stimulating and maximising the demand for, and holding of, gold.

*Gold demand trends: fourth quarter and full year 2009, http://www.research.gold.org/supply_demand/gold_demand_trends/.