Gold prices hit a record price above 1,100 dollars an ounce in trading in London on Friday following a report that Sri Lanka had joined India in purchasing gold for purposes of holding its foreign reserves previousl held in US dollars.

Central Bank Governor Ajit Nivard Cabraal yesterday confirmed that the bank had been buying gold on a regular basis for the last six or seven months and was holding a percentage of the country’s reserves in gold.

"The trend is very clear that gold prices are moving up and is a good way of holding our reserves on a long term basis," Cabraal said.

He agreed that Sri Lanka was not buying gold on the same scale that India was but said our purchases in per capita terms of population was much higher.

Cabraal declined to state what proportion of the country’s reserves are now being held in gold confining himself to saying "we have a substantial holding and are still buying."

The World Gold Council which is the industry body for the precious metal said before gold struck a record high of 1,101.42 dollars an ounce that "the Central Bank of Sri Lanka had announced that it is buying gold to diversify its reserves."

After hitting a record high, gold prices declined to US$ 1,092.65 an ounce in late London trading. The AFP news agency said that gold had struck a series of highs last week after the IMF said it had carried out a massive sale of the precious metal to India.

"Over the past year central banks, which have been net sellers of gold are now a new and increasingly important source of demand," WGC chief executive Aram Shishmanian said in the council’s statement.

"This latest announcement demonstrates that many central banks are reassessing their reserve asset management policies."

Gold had reached a record high of 1,087.80 dollars on Tuesday as the IMF said it had sold 200 tonnes of gold to India’s central bank over a two-week period last month for 6.7 billion dollars to bolster its finances.

Gold and other commodity prices have surged in recent months amid a move away from the dollar, which has been slumping. The move accelerated last month on a report that Gulf states may stop using the greenback for oil trading.

The metal is also winning support from fears over a possible spike in inflation, as gold is widely regarded by investors as a safe store of value.

The sale to India was nearly half the 403.3 tonnes of gold that the IMF has targeted for sale over the coming years.

The Washington-based IMF, which currently holds 3,217 tonnes of gold, is the third-largest official holder of the precious metal after the United States and Germany.

India is the world’s biggest consumer of gold, importing between 700 and 800 tonnes of the metal every year or 20 percent of global demand.

A senior IMF official said that the IMF was "lucky" in selling the 200 tonnes to India for roughly 1,045 dollars an ounce, compared with 850 dollars an ounce in April 2008.

Gold’s price, which has risen more than 20 percent this year, has a bright future thanks to improving demand caused by the financial crisis, industry experts said this week.

"Although it’s difficult to predict in the short term, the overall picture is very healthy," Mark Lynam, an executive for AngloGold Ashanti — the world’s third largest gold producer — told the London Bullion Market Association annual conference in Edinburgh.