UBS ups gold forecast as risk aversion spurs ETF buying

LONDON, July 14 (Reuters) - Investment bank UBS (UBSN.VX) said on Monday it has raised its short-term gold price forecasts because financial market turmoil has boosted the appeal of gold as a safe haven for investment.

The bank said it sees the average gold price at $1,000 an ounce over the next month, against a previous forecast for $900, and at $1,050 an ounce over the next three months, versus its former estimate of $850.

UBS said strong buying on Friday as panic swept financial markets due to fears about the health of U.S. mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) showed the strength of investor interest in gold.

Gold rallied to a four-month high of $967.60 an ounce as the equity markets wilted and the dollar slid. Gold holdings of the world's largest gold-backed exchange traded fund, SPDR Gold Trust (GLD.P), rose to a record 705.90 tonnes.

"We believe that in the near term gold will be driven by risk aversion fears," said UBS head of metals strategy John Reade.

"Following the weekend moves to reassure financial markets about the future of Freddie and Fannie, there may be some respite to these fears. But this may be only short-lived."

"We believe that the moves in ETF holdings is evidence that investors have become much more worried about systemic risk and that, once worried, investors will remain concerned until there is clear evidence that the situation is getting better."

"To that end we upgrade our short-term gold price forecasts ... but we note that if sustained, heavy inflows into the ETF occur, the move in gold could become self-fulfilling and much higher numbers could result."

(Reporting by Jan Harvey; Editing by Peter Blackburn)