Low interest rates and easy monetary policies from central banks after the credit meltdown are among the factors helping to drive gold prices and exchange traded funds higher.

However, some central banks are adding to their gold holdings as they try to diversify their strategic reserves away from the U.S. dollar and the wild swings in the currency markets.

Year to date, world central banks have bought 203.5 metric tons of gold, or 168% more than the 76 tons for all of 2010, according to Kitco News. In the first five months of the year, central banks bought the equivalent of 15% of total global gold mining production, according to a Commerzbank research note. [Gold, Silver ETFs Back on the March.]

The majority of the demand is coming from the emerging markets, with Mexico purchasing 98.8 tons, Russia 48 tons, Thailand 26.3 tons and, more recently, South Korea 25 tons.

Observers have noted that central banks are buying to rebalance their portfolios. “They wanted to rebalance it (the percentage) back up to what they believed was the appropriate strategic level,” said Natalie Dempster, director, government affairs, with the World Gold Council. Dempster also notes that more “meaningful” buying will continue, with the “need to rebalance, the deterioration in the quality of other reserve assets, and a continued emphasis on risk management.”

“The central-bank buying is coming on top of speculative buying and creating a Perfect Storm for gold,” remarked Ross Norman, chief executive officer of Sharps Pixley.

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