Gold may hit $1,100/oz over next 6 months: GFMS

LONDON (Reuters) - Gold prices are likely to correct after their current run above $1,000 an ounce, but may rebound to as high as $1,100 within the next six months if inflation fears grow, metals consultancy GFMS said on Monday.

"I would expect an average price of the rest of this year of about $950 an ounce," GFMS chairman Philip Klapwijk said.

"We are likely to see a retracement significantly below that level over the next couple of weeks -- we could well head toward the $900 mark," he said.

"But I would expect that by the beginning of next year we will be back above the $1,000 level again, and maybe with the market heading toward $1,050 and even $1,100 if there are sufficient signs of inflation and concerns over the U.S. dollar to motivate significant investment inflows into the market."

Gold's current break higher, which took spot prices to 18-month highs of $1,011.55 an ounce on Friday, was likely fueled by a wave of speculative interest, he said. Spot gold was at $999.85 an ounce at 1428 GMT on Monday.

But with net long positions on the COMEX division of New York's NYMEX futures exchange at all-time highs, the dollar looking oversold, and inflation indicators still benign, gold is likely to correct.

"You have already got very substantial short positions in the U.S. dollar and conversely record long speculative positions on the COMEX in gold," he said.

"I think this is setting us up for a big retracement in gold and a bear market rally in the U.S. dollar."

DEMAND WEAKNESS

The closure of leading gold miner Barrick Gold's hedgebook of forward sales announced last week shows an important demand element is set to dry up, Klapwijk said, with AngloGold Ashanti the only top miner still significantly hedged. [ID:nN08295810]

"This was a great support for the price, but looking ahead we aren't going to have that," he said.

"We are going to have neither the big contribution to demand in terms of tonnage being taken out of the market, or... the backstop for prices in the form of producer dehedging."

Additionally, demand for gold jewelry from key bullion consumers such as India and Turkey is expected to remain soft as local currency prices stay firm.

Demand for physical investment products such as bars also remains weaker than in the first quarter, when buying surged. Klapwijk said a lack of buying to back gold exchange-traded funds made him wary of the sustainability of current prices.

In the longer term, a fall in mine supply is likely to prove an important support for prices. While mine output is seen rising in 2009, the uptick is likely to be temporary, he said.

CENBANK SALES LOWER

Gold sales from central banks are also likely to be significantly lower next year, he added, though given the IMF's expected sales of 403 tonnes of gold in the near future, the official sector is not likely to be a net gold buyer.

"We will see official sector sales rise again next year, but they will still be at a low level and this will be very much down to the IMF," Klapwijk said. "In the absence of the IMF, neutrality will be a more likely call, if not net purchases."

China remains structurally underweight in gold, he said, with bullion making up less than 1 percent of its official reserve holdings.

"We would therefore expect there is a willingness on the part of the Chinese at the right time and to some extent at the right price to increase their exposure to gold," he said.

He added though that this did not necessarily mean they would be buying on the international market, with many Chinese government gold purchases coming from the local market so far.

(Reporting by Jan Harvey; Editing by Keiron Henderson)