Villiger said sales of around 1,300 tonne of excess Swiss gold reserves would probably be spread over the next five to seven years to avoid disrupting price trends.

The Swiss government has approved draft law which would serve the Swiss franc's link to gold, paving the way for the Swiss National Bank to sell around 1,300 tonnes of gold. The plan to revalue and gradually sell gold reserves requires parliamentary approval and amendment to the constitution and must be endorsed by Swiss voters in a referendum.

The impact of this statement on the international prices was severe during the week ended on Saturday. Prices fell to $293 per ounce on Wednesday in the international market from Monday's $302 per ounce. Following suit, domestic gold prices too declined to Rs 4,150 per ten grammes on Wednesday from the previous week's Rs4,250.

Though there is enough time for the deadline, the question that is haunting every gold investor however is: if allowed, what will be the impact of the Swiss sale of gold on the price?

If one were to go by last year's experience, this sales could hurt prices very badly. Even if one were to take a sale of around 250 tonnes a year, the quantity appears very large for the market. During 1997, around 393 tonne of additional supply came from the central banks. The damage to the gold prices was around 30 per cent. But more than the damage, this sale would create a negative sentiment which would hurt the price much more than the actual sale.

This is simply because the fear of the addition sale would in all probability keep gold buyers away. In fact, while huge sale by the central banks of Belgium and Australia had negatively affected the gold price last year. A large blow came was inflicted by the Swiss Banks' intentions to offload gold after two years. If Switzerland's plan to sell the yellow metalmaterialise, the prices would fall much in advance of the actual sales as the whole market would be waiting for the Swiss Bank's supply.

Perhaps, implications of such a huge sale on gold prices may act as a hurdle in getting the approval from the parliament and voters. As such, over the longer period, the fear of a Swiss gold sale may not be as big as it appears at the moment.

EU holds the key to gold recovery

In the interim the factor which should decide the fate of gold is the European Monetary Union. After European Monetary Union (EMU) starts on January 1, 1999, member countries (likely to include the largest gold holder such as France, Germany, and Italy) will be bound by the Articles of the European Central Bank (ECB). One stipulation is that transactions in reserves remaining with the national central banks, after an initial amount has been transferred on to the ECB, must accord with policies set down by the ECB.

One conclusion of the meeting between gold producers and leading centralbankers during the World Economic Forum meeting at Davos in January was the gold would form part of the reserves of the European Central Bank. All future members of EMU currently hold gold in their national reserves, some on a very large scale.

They will want to see the new supranational central bank look as much as possible like their own central banks. The ECB's Governing Council will be composed largely of current national central bank governors.

How much gold the ECB should hold will be decided by the Bank's Governing Council sometime in the second half of this year. At present, proportions held by potential members vary from 40 per cent in France to as little as 1.5 percent in Ireland. The precise amount in the ECB should not matter unduly to the market. This figure is expected to be around 20 per cent. Thus, in the medium term, prices would be directly linked to the reserve ratio.