Spot gold was last quoted at $ 282.20/$ 282.70 a troy ounce, off the day's low of $ 279.70, which represented a $ 10.15 fall from Thursday's close in New York. The surprise announcement by the UK treasury saw gold fall sharply in European trading, and the price continued to drop when US traders sold futures on New York's COMEX exchange. Traders said many market players were caught short as the gold price fell further, sparking a bout of short covering which lifted gold off the lows. "A lot of traders would have been getting short on the back of this... I think maybe we can get a small bounce here but any decent-sized bounces are going to be sold into," a dealer said. Dealers said gold could see good buying below $280.00, which might lend some support to the market. The UKtreasury said it would cut its gold reserves to 300 tonnes from the present 715 tonnes. Sales of 125 tonnes in 1999-2000 would be through auctions conducted by the Bank of England in parcels of 25 tonnes, or 800,000 ounces.

The Treasury said the gold holdings would be replaced by currency assets. Gold options volatilities - an indicator of market sentiment - surged after the Treasury announcement. "The option market has gone a little crazy on this, options volatilities are a lot higher today than what they were yesterday across the curve," a dealer said.

One-month gold option volatility was around 11.5 to 12 per cent on Friday, compared with 8.5 per cent on Thursday. Analysts said the decision by Britain to sell more than half its gold reserves was a massive blow to the metal.