Gold may rally towards $1,000 an ounce

Gold coins are displayed at the Ginza Tanaka store in Tokyo September 18, 2008. Gold may return to $1,000 an ounce as the global financial crisis highlights investors' need for a haven from risk.

LONDON (Reuters) - Gold may return to $1,000 an ounce as the global financial crisis highlights investors' need for a haven from risk.

Bullion prices are now just over $850 an ounce and looks well supported by limitations to supply and firm demand from investors and jewellers.

Rallying gold prices have so far largely shrugged off attempts by governments and central banks to restore stability to the financial markets, as investors expect further problems.

A recovery in equities and the dollar after U.S. officials said they were discussing plans to stabilise financial markets knocked gold down 2 percent on Friday after a week of huge gains. But prices quickly bounced back above $850.

With risk aversion rampant, mine supply tight, central bank selling low and physical demand emerging on dips, analysts say any price falls are likely to be short lived.

"Such a big move as we had could be corrected," said Commerzbank analyst Eugen Weinberg. "But this correction will be used by many as a chance to buy again, because the crisis of trust in the financial system is far from over."

"Market participants are still concerned, and that is why demand for gold will stay high."

Gold prices posted their largest ever rally in dollar terms on Wednesday as the U.S. market plunged on fears of further problems among Wall Street investment banks, after Lehman Brothers sought bankruptcy protection on Monday.

Subsequent heavy losses among banking stocks and doubts over the government's bailout of U.S. insurance group AIG exacerbated fears over the outlook for the financial sector.

The resulting panic sparked a flight to safety that at one point pushed gold up more than $140 from last Friday's nominal close, but analysts expected any positive news on the outlook for the financial sector to lead to a fall in prices.

Saxo Bank global products manager Philip Carlsson says government intervention to stabilise the financial system was likely to pressure gold prices in the short term. "But there are more banks that are facing problems," he said.

As assets such as equities have dropped in value, and with the currency markets unstable, investors are increasingly buying gold as a haven from risk.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust , has reported a 7 percent inflow to its bullion reserves since Lehman Brothers announced it was seeking bankruptcy protection on Monday.

Demand for gold coins, bars and jewellery could suffer from higher prices. But analysts say physical demand, which picked up to almost unprecedented levels as prices slipped back towards $850 an ounce, will provide a solid floor for prices.

In the longer term, analysts point to tightening fundamentals, such as easing mine supply and lower Central Bank selling, as supportive factors for gold.

Metals consultancy GFMS said in a report on Wednesday that investment demand would send gold well above $900 an ounce this year on financial turmoil and a weakening dollar, which encourages buying of gold as a currency hedge.

Global mine output was down 70 tonnes or 6 percent in the first half of 2008, with cost inflation crimping output, it said.

But it is the crisis of confidence in the financial markets that is really likely to support buying interest.

"If we hear any more horror stories about mega names being in trouble, people will still want to buy (gold) as a haven," said Afshin Nabavi, head of trading at MKS Finance.

"We are heading for $1,000 again."