Gold price seen returning to record high this year (2009)

Enlarge Photo Gold bars are displayed at the Ginza Tanaka store in Tokyo September 18, 2008. REUTERS/Yuriko...

Gold prices will likely eclipse last year's record-high levels in the first half of the year as stronger investment demand offsets the impact of relatively weak jewelry fabrication and lower de-hedging activity, a closely watched report said on Wednesday.

The gold price could average $1,175 an ounce in the first half of 2010, up from last year's average of $972, GFMS, a London-based consultancy, said in an update of its Gold Survey 2009 report.

"What we see in 2010 is that there is a fair chance that investors will drive prices above $1,300 an ounce." Philip Klapwijk, GFMS chairman, told Reuters in Toronto.

"But I don't think we are going to get into a situation where gold trades for a substantial period at those sort of levels."

The metal leapt 25 percent last year and hit a record high of $1,226.10 an ounce in December, helped by the weakening U.S. dollar and gold's appeal as a hedge against inflation. It has since retreated by about 8 percent, and was at $1,128 an ounce on Wednesday.

Klapwijk said the same factors should continue to benefit gold this year as economic recovery is likely to be sluggish, with a fair chance of a "double dip" in the United States, Europe and Japan.

This suggests that there may be little or no tightening of fiscal and monetary policies this year in a number of major economies, he said.

Central banks are likely to keep interest rates near zero for most or all of the year, while government debt levels will continue to rise, raising the specter of a prolonged slide in the U.S. dollar and higher inflation in the future.

However, the consultancy said the metal's increased dependence on investment demand -- global investment exceeded jewelry demand last year for the first time since 1980, it said -- leaves gold "increasingly vulnerable to a major correction when the circumstances favoring investment disappear".

DE-HEDGING TO FADE, JEWELRY WEAK

Producer de-hedging -- or the elimination of contracted future sales -- which helped drive gold higher late last year on the back of Barrick Gold's move to close its hedge position, should fade sharply in 2010 due to a much smaller global hedge book.

Jewelry demand should recover modestly in the first half from 2009, when consumption was derailed by the global recession. However, it should remain weak by historical standards in 2010 and could slide later in the year as pent-up demand from last year fades, GFMS said.

MODERATE SUPPLY RISE

Global mine supply should rise modestly, including a 3.9 percent year-over-year gain in the first half, but the gains are unlikely to have a big impact on gold prices, GFMS said.

GFMS sees the sector returning to selling this year, with expected net sales of 69 tonnes expected in the first half.

Both these factors should be offset by a sharp drop in scrap sales from last year's record level of 1,541 tonnes, as 2009's price surge, combined with a difficult economy, prompted many consumers to sell unwanted jewelry.