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UPDATE:Gold To Stay Important Asset Of Euro Central Banks-ECB

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EDINBURGH -(Dow Jones)- Gold will remain an important asset for European central banks as risk diversification becomes a more significant issue, the European Central Bank said Monday.

Speaking at the London Bullion Market Association conference, Paul Mercier, deputy director general of market operations at the European Central Bank, said gold is no longer important from a monetary point because it's not backing currency circulation, but is important as an asset.

"Gold makes sense as a contributor to risk diversification," Mercier said. " Even if some central banks continue to sell and there is a new potential seller with the IMF, I wouldn't conclude that gold holdings in central banks will decline in the coming years."

He said the Eurosystem holds 10,800 metric tons of gold, roughly one third of world gold reserves.

Mercier said the Eurosystem holds more gold in value terms than it did 10 years ago.

A third Central Bank Gold Agreement started at the end of September so there will be more central bank gold selling in the next five years, he said, adding some central banks in the agreement are overweight in gold.

"But there is a difference between selling gold and still wanting to hold gold," he said.

The third CBGA agreement will cap gold sales at 400 tons per year for a total 2,000 tons allowed over the five years.

The 400 ton cap is reduced from 500 tons in the last agreement, which ended at the end of September with gold sales that totaled 1,883 tons. The final year of the agreement sales only totaled 155 tons, significantly less than the allowed 500 tons.

"Gold's characteristics are valued by central banks, which are conservative when they invest," Mercier said.

"Gold will remain an important element of central bank reserves," he said. " Yes we will sell gold, but we don't want to get rid of it."

He said selling in the next five years of the agreement is for "optimization" of the banks' portfolio and after that there could be more selling "if justified."

-By Devon Maylie, Dow Jones Newswires; +44 (0)20 7842 9483; devon.maylie@ dowjones.com

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