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SINGAPORE - The gold market will likely see a softening in the next two months as the impact of the massive gold selling by the International Monetary Fund (IMF) sinks in.

The IMF said on Wednesday that its second phase sale of 191.3 tons of gold will "shortly" be underway. The move is in a bid to reduce its dependence on lending revenue.

"In the short term of one to two months, there will be a bearish impact on gold prices because of the large quantity being offered," said Mr Wong Eng Soon, investment analyst at trading firm Phillip Futures.

At Wednesday's market price of US$1,120 ($1,548) an ounce, the gold to be sold by IMF would be worth nearly $9.7 billion.

To avoid disruption of the gold market, IMF said the sale would be conducted in stages and would be based on market prices.

On Thursday, spot gold price fell close to 1.8 percent to the lowest level of US$1,100.22 per ounce.

Gold futures for April delivery also dropped 1.7 per cent or US$18.50 to US$1,101 an ounce.

Analysts, however, do not see gold prices falling below US$1,065 per ounce. They said gold would recover to the US$1,200 reference level it had reached early December last year.

If there is a correction in prices, the drop in investor demand will be picked up by demand in the jewellery and industrial sectors, they said.

"Big players like the institutions may take this chance to increase their holdings. Also, India and China are the two largest consumers of gold and their economic recovery will continue strong demand for the commodity," said Mr Wong.

Central banks may also take the opportunity to increase their gold allocation; thus, providing a more bullish long-term prospect for gold.

"Net purchasing by central banks in recent quarters combined with the constraints in mine supply and stable level of recycling activity continue to make gold an ideal portfolio diversifier," said Mr Aram Shishmanian, chief executive officer of the World Gold Council (WGC).

Meanwhile, analysts reactions are mixed if this new sale might replicate the negative impact the first phase sale of 212 tons of gold had on the Australian dollar and oil prices.

WGC managing director Albert Cheng said: "Australian Dollar is more of a proxy to commodities because of its economy is hugely supported by the performance of commodities in general."

From TODAY, Monday, 22-Feb-2010

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