Gold's glitter lures buyers

By Atul Prakash - Analysis

LONDON (Reuters) - Gold's near vertical climb to historic highs approaching the key $1,000 mark shows no sign of abating as bullish forces such as a sinking dollar and record high oil are not seen fading anytime soon.

Fears that expensive oil will stoke inflation combined with worries over potential stock market losses and the U.S. on the brink of possible economic recession will propel gold higher still, analysts say.

"Don't be surprised to see gold trade up to $1,100 (an ounce) or even $1,200 before year-end 2008," said Jeffrey Nichols, managing director of American Precious Metals Advisors.

"And, with the right confluence of economic and geopolitical developments, we could see gold spike to $1,500 or even $2,000 in the next few years," he said.

Gold hit a record high of $991.90 an ounce on Thursday and was at $986.90/987.40 at 1144 GMT. It has jumped 20 percent this year, 56 percent in the past 12 months, doubled in about 2 years and surged from a low of around $250 in August 1999.

It was previously fixed at a record high of $850 in January 1980 as high inflation linked to strong oil, Soviet intervention in Afghanistan and the impact of the Iranian revolution prompted investors to heavily buy gold. After adjusting for inflation, the 1980 high was $2,119.30 at 2007 prices.

The market has ridden waves of investor buying, which lifted prices nearly 50 percent in the past six months, ignoring a handful of negative factors, with most players betting on even higher prices this year and next.

The metal's traditional role as a hedge against inflation and political and economic uncertainty, its tendency to move in the opposite direction to the dollar and its qualities as a store of value and an alternative currency make it a hot asset.

"We are in a special situation, where a lot of fundamentals are speaking for gold. The dollar is one driver, but even if it rebounds there are a lot of other fundamentals that make people buy gold," said Michael Widmer, an analyst at Lehman Brothers.

"Gold is an investment alternative to hedge against the financial stress. And credit markets are now creating a tremendous amount of stress across the entire economy," said portfolio manager Joseph Foster of Van Eck International Investors Gold Fund, which manages $770 million.

"That's the big driver for gold right now."

PRICE DRIVERS

Analysts say the dollar's slide is not yet over despite hitting record lows, as the move by the U.S. Federal Reserve to cut interest rates and chances of lowering them further have prompted investors to switch into assets like gold.

The weaker dollar, which makes gold cheaper for other currency holders and often lifts metal demand, is also necessary for the United States to retain its export competitiveness and cut its huge trade deficits, analysts say.

Gold is also supported from record high oil prices above $104 a barrel, which has stoked inflations fears and the geopolitical environment, with tensions in Iran, Iraq, Pakistan and Israel, helping its safe-haven appeal.