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Gold Poised to Build on Gains

LONDON - Gold has scope to build on the gains that took it to an 11-month high above $1,000 an ounce on Friday, as investment demand surges and supply fails to keep up, fund manager BlackRock said.

Investment in gold has risen sharply as fears over the stability of the global financial system push investors towards socalled safe-haven assets such as bullion.

These flows pushed gold above $1,000 an ounce on Friday for the first time since March 2008. According to Evy Hambro, London-based managing director of BlackRock, the metal could go higher still.

"Production is falling, central banks are selling less, gold jewellery demand continues to go well and we have strong investment buying," he said. "If you put all that together, the likelihood of gold moving higher is very high." The current economic climate is fuelling demand for the precious metal, he said. Buying of gold-backed exchangetraded funds has reached record levels, fuelled by volatility in other asset prices.

UNCERTAINTY
"In periods of uncertainty, be it political or economic uncertainty, gold tends to do well," said Hambro.

"Whether you have periods of inflation or deflation, gold holds its purchasing power, so it is a very efficient way of storing wealth."

"In today's economic environment.... with uncertainty on currency markets, uncertainty on equity markets, uncertainty in the banking system, gold is a natural place for people to turn."

Gold miners have not yet lifted their production in response to rising prices, Hambro said, and they are unlikely to do so until prices stabilise at higher levels.

"The production of gold by gold mining companies had its largest annual fall in 2008 despite prices being very strong around the world," he said. "Gold production peaked back in 2001 and has been declining almost every year since then."

"Until we see a sustainable price at a higher level, it won't encourage the gold companies to activate any growth in supply," he added. "We haven't seen that yet." With the gap between supply and demand set to grow, he said, prices are likely to be forced higher.

Hambro said a particularly good omen for gold is bullion's ability to move higher at a time its usual key price driver, the dollar, is strengthening.

A stronger dollar usually weighs on gold, which is often bought as an alternative investment to the U.S. currency. However, both assets are benefiting from investors' flight to safety.

"The fact that it is doing so well against what is normally an overpowering force -- the U.S. dollar -- shows you just how strong appetite is for gold right now," Hambro said. "Our view is that gold could easily go higher than here."

SOURCE:Reuters

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