Oct. 26 (Bloomberg) -- Central banks will continue to be net purchasers of gold for the next few years as the metal rallies to a record and countries diversify their reserves, according to the World Gold Council.

This year, net purchases by central banks totaled 220 metric tons, according to data available at the end of September, compared with 74 tons in all of 2010, said Natalie Dempster, the managing director of government affairs at the producer-funded council. Emerging economies including Russia, India and China will continue to be big buyers, she said.

Central banks are expanding reserves for the second straight year as prices head for an 11th consecutive annual gain. Futures in New York reached a record $1,923.70 an ounce on Sept. 6 as faltering economies and financial turmoil boosted the appeal of the precious metal as a haven asset.

"The central banks in emerging markets have seen a sharp increase because of the financial crisis and rebalancing of their assets," Dempster said yesterday in a telephone interview. "European central banks have tightened their sales after having been very large sellers."

About 1.1 tons of gold were sold by European central banks in the year to Sept. 26, and the International Monetary Fund sold 52.2 tons, according to the council. The total is 61 percent less than in the previous year. Central banks in Europe are limited to sales of 400 tons each year through September
2014 under an annual agreement with the IMF.

David Fuller's view We would expect the World Gold Council to be bullish but they are also right about the trend of central bank (CB) sales versus purchases. Inevitably, governments with persistent deficits will be the main sellers, and the IMF will remain under pressure to sell more gold to help support impoverished nations.

Consequently we should not be surprised to see more sales of gold by some European CBs and the IMF in coming months and years. However, the fashion for doing so had waned in line with bullion's uptrend (historic, weekly & daily) Also, Germany is under the least pressure to sell and it has the biggest holding of European gold, as we can see from the latest table that I have been able to locate, which does not include recent data shown by the WGC above.

The elephant in the room among debtor nations with large gold holding is the USA. Nevertheless, I assume that there would be little chance of Congress agreeing to sales in the current environment.

China is the most obvious candidate for an increase in gold reserves. However, it will presumably remain reluctant to chase the bullion price higher, as we have seen with other commodities, especially as gold is not crucial to the immediate needs of China's large population, unlike staple foods.

China's rapidly growing middleclass, however, has shown a voracious appetite for acquiring gold bullion. Therefore the amount of gold held within China is increasingly rapidly. China is also the world's largest producer of the yellow metal so it has a steady supply. Consequently, my guess is that China's CB is unlikely to be a major buyer in the open market, until or unless we see a major setback in the price of bullion. This would be consistent with China's purchases of other commodities required for its rapidly growing economy.

Technically, (see charts above) gold's action remains consistent with a consolidation and support building phase prior to a resumption of its overall upward trend over the medium term, as I mentioned yesterday in my chart review. There is a good chance that we have seen the reaction low during this phase.