Gold to resume uptrend on sovereign risk fears

A man touches a 220 kg (485 pounds) gold bar on display at the Jinguashi Gold Ecological Park in Taipei County March 5, 2010.

LONDON (Reuters) - Gold is set to resume its upward trend over the next month as concerns over euro zone sovereign debt and wider instability in the financial markets spark demand for the metal as a refuge from risk, a Reuters poll found.

A total 17 out of 24 respondents to the poll conducted earlier this month expect the precious metal to end this quarter above $1,200 an ounce. Six further respondents see prices holding in the metal's current $1,150-1,200 range.

"Gold will remain well bid in the $1,200-1,250 area as risk levels for further sovereign credit deterioration remain high," said Greg Orrell, portfolio manager of U.S.-based OCM Gold Fund.

Of the 26 respondents who forecast ranges for the end of the year, the picture was even brighter, with 21 forecasting gold prices at record highs above $1,250 an ounce. Dollar-denominated prices hit a historic high in mid-May at $1,248.95 an ounce.

Of the larger U.S. banks, Goldman Sachs and JP Morgan see prices ending the year in the $1,200-$1,250 range, while Bank of America-Merrill Lynch forecast an end-2010 range of $1,250-1300.

The lowest forecasts came from the UK's RBS Global Banking & Markets, who predicted gold would end both the first half and the full year in the $1,100-1,150 range.

Six respondents expect spot gold to trade above $1,400 an ounce by year-end.

"(The) key driver (is) continuing global uncertainty, which seems to have little chance of abating," said one of these, Charles Kernot, director of metals and mining at London's Evolution Securities.

"People are becoming more concerned about government abilities to finance country budget deficits, and there is essentially no cash to provide a second raft of bailouts."

OVERBOUGHT

Downside risks to gold include overbought conditions in a market that has risen 8.7 percent already this year, and the bearish technical picture that has emerged since prices dropped from the record $1,248.95 an ounce in mid-May.

Longer term, the metal may be threatened by the prospect that U.S. interest rates may be lifted from the record lows.

A rise in interest rates would reduce the allure of holding gold as it is a non-interest bearing asset.

Such interest rate hikes are not expected in the near future, however. "The Fed is unlikely to begin to tighten until 2011," said Peter Buchanan, senior economist at CIBC Capital Markets in Canada.

At the beginning of the year, U.S. dollar strength was identified as a possible negative factor for gold.

Usually, strength in the U.S. currency makes dollar-priced commodities more expensive for holders of other metals, and gold was often bought as an alternative to a falling dollar.

However, the precious metal has posted strong gains this year despite a near 15 percent rise in the value of the dollar versus the euro. Both gold and the U.S. currency are acting as safe havens from risk in wider financial markets, analysts say.

"It has become clear that gold is now preferred as an alternative to all currencies, because investors are growing more wary of sovereign risk in major countries," said Koichiro Kamei, managing director of Tokyo's Market Strategy Institute.

Gold also reached record highs in sterling, euro and Swiss franc terms earlier this month.

(Reporting by Jan Harvey; Editing by Amanda Cooper and Veronica Brown)