Gold investors now hold more of the precious metal than either Japan or Switzerland as volatility in the financial markets has prompted a flight to safety.

Exchange Traded Funds (ETFs), which allow investors to buy shares in physical gold, owned more than 1,190 tonnes at the end of last year, worth $33 billion (£22.7 billion).

The amount invested in ETFs grew by 307 tonnes last year, according to the World Gold Council. SPDR Gold, the largest fund, which is based in New York, now holds 795.25 tonnes, which is more than twice the amount held by the Bank of England. SPDR has the world's seventh-largest gold reserves. ETFs in total hold the sixth-largest reserves.

Natalie Dempster, head of investment at the World Gold Council, said: “As investors became increasingly concerned by the state of the economy during the course of the year, they turned to gold as a store of value.” Volatility in stock and currency markets led to large inflows into alternative stores of wealth last year and gold hit a record high of $1,002 per ounce.

The high price prompted France, which has the world's fourth-largest reserves, to sell 113.5 tonnes of gold last year. At an average price of $872 per ounce, this raised $3.5billion. France sold 32.1 tonnes worth nearly $1billion in the final quarter of the year alone.

Most Western countries are long-term sellers of gold and do so at a regulated and slow pace. France, however, appears to have taken advantage of the high price to raise additional revenue.

By comparison, Gordon Brown decided in 1997 to sell more than half of the UK's gold reserves when prices were at an historically low level. The Bank of England sold 400 tonnes at an average price of $275 per ounce, raising only slightly more than France did last year.

Not all countries are net sellers of gold. The instability in currency markets has encouraged some central banks to increase their gold reserves. Russia added 57.7 tonnes worth $1.7 billion last year, taking its total to 495.9 tonnes. Brazil bought 19.9 tonnes worth $612million to give it a total reserve of 33.6 tonnes.

Jonathan Guy, metals analyst at Investec, said: “Gold has burnished its credentials as a minor reserve currency in recent months when compared with many of its currency rivals. Over the longer term, we retain the view that central banks, outside of the Western legacy sellers, are likely to increase their holdings.”

Sales of gold jewellery in the United States fell 29 per cent last year, but in other parts of the world they rose strongly. Demand was up by 29 per cent in India, China by 10 per cent and 15per cent in the Middle East. In these territories, jewellery is often bought by families in preference to storing wealth in a bank.

Analysts expect the gold price to remain high this year amid continuing uncertainty about the prospects for the global economy and concern over bank liquidity. However, the average price may not reach the same level as last year as demand for jewellery in Western markets continues to fall.

Mr Guy said: “While we recognise the likelihood of spikes above $1,000 per ounce during 2009, we believe that weaker physical demand limits the potential for a sustained rally in the metal.”

Investec is forecasting an average price of $825 per ounce this year and $800 per ounce next year.

Official gold holdings (in tonnes)

1. United States 8,133.5

2. Germany 3,412.6

3. IMF 3,217.3

4. France 2,508.8

5. Italy 2,451.8

6. ETFs 1,190

7. Switzerland 1,040.1

(SPDR ETF 795.25)

8. Japan 765.2

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