Trading also was likely to be less volatile than in the past, but lacklustre bidding could sour that bullish sentiment and push gold down to $290, traders warned. The Bank of England was scheduled to sell 25 tonnes of gold in the third auction since July under a policy to cut by more than half its 715 tonnes of bullion in the next few years. Gold has been edging higher in the past 10 days in a range which traders put at $292-302.

"We are trading in a range and the auction may do little more than verify that range," one trader said. Spot gold was quoted at $298.20/298.70 an ounce at 0630 GMT.

The first auction propelled gold lower, leading to a 20-year low of $252 in August. After the second auction in September gold began to move up.

Eventually it rallied to a two-year high of $338 after European central bankspledged to limit gold sales and lending.

With the pledge from the central banks, sentiment toward gold has fundamentally changed, traders said. "A floor has been established at $280-290 and bullish sentiment is creeping back in. I would expect the auction to lift gold above $300 again," one said.

But there was reason to be cautious if the amount of bidding or other measures were poor. "In case the results are not encouraging, sentiment will reverse and gold will go down," another trader said. He put the lower limit at $290. Several traders said they would not be surprised to see gold producers vie for the UK gold, as two major South African miners did last time. "It is the year's last chance to buy a lot of gold at one price," a trader said.

But the market is keenly conscious that a sharp spike in the gold price can wreak havoc on the finances of producers which have large hedges betting on a lower gold price. At least two producers were hit with large losses on their hedge books.