Gold to hit record highs next year

OUTLOOK 2008

Gold prices will rise to a record in 2008, increasing for an unprecedented eighth consecutive year, as investors seek protection from accelerating inflation, analysts say.

Gold will probably average $800 an ounce, compared with $696 this year, according to the median estimate of 37 traders, analysts and investors surveyed by Bloomberg News.

Gold has gained 30 per cent to $827.20 an ounce in London this year, its best year since 1979, when the Iranian revolution crippled crude-oil exports and US inflation surpassed 13 per cent.

"I do see gold hitting a new high at some point in the first half," said UBS's John Reade.

Gold rose as record oil prices drove up inflation, and supplies from South Africa, the world's biggest producer, dropped to the lowest in 84 years.

Mounting losses in credit markets tied to sub-prime mortgage loans spurred demand for alternatives to stocks and bonds, while the dollar's drop to a record against a basket of trade-weighted currencies boosted investor interest in commodities.

Prices rose to within 0.5 per cent of the record high on November 7. The metal rose $1.61, or 0.2 per cent, to $827.20 an ounce as of 6:25 am in London. Gold is the second-best performing metal, after lead, on the UBS Bloomberg Constant Maturity Commodity Index this year. The index of 26 commodities is up 23 per cent.

US consumer prices increased 0.8 per cent in November, the most in more than two years. Inflation in the 13-nation euro region accelerated to 3.1 per cent in November, the fastest since 2001, according to Eurostat. Japanese consumer prices rose 0.1 per cent in October, the first gain of 2007.

"The two stories for 2008 are going to be the sub-prime credit crisis and inflationary issues," said Ross Norman, director of London-based data provider TheBullionDesk.com. Gold may climb to "pretty well above $1,000 next year," he said.

Investment demand for gold may "easily" rise to 500 tonnes, worth about $13 billion, compared with 384 tonnes last year, said Philip Klapwijk, chairman of London-based research company GFMS.

``We see the investor base for gold widening,'' he said. ``We're still talking small numbers compared to equity flows or other assets.''

"Demand for gold as a safe haven won't disappear, even if the economy picks up," said Wolfgang Wrzesniok-Rossbach, head of marketing and sales at Hanau, Germany-based metals refiner Heraeus Metallhandels GmbH. "People will still put a small percentage of their portfolios into gold."

Stagnating production may buoy prices. Global output fell to a 10-year low of 2,477 tonnes last year, according to GFMS. Supply from South Africa declined 7.5 per cent to the lowest since 1922 as companies were forced to dig deeper and pay workers more.

Gold "is still a positive story, because of mine supply, which continues to be highly constrained," said Michael Jansen, an analyst at JPMorgan Securities in London.

Prices may gain as much as $100 in 2008, because of production shortages, said Graham Birch, the London-based head of BlackRock's natural resources team that manages $40 billion. "The price needs to be north of $1,000," he said. "$800 is not enough to reverse the gradual decline in production."

The metal may also benefit from continued restrictions on sales by central banks, the biggest holders.