Gold May Breach $1,300/Oz In Last Stage Of Bull Rally

Gold prices may rise above $1,300 a troy ounce in the next two years as it nears the end of its multi-year bull market, U.K.-based consultancy GFMS Ltd. said in an annual gold survey.

Record levels of gold demand from investors worried about sovereign debt, currencies and inflation should continue in 2010 and 2011 to make up for the steep falloff in jewelry demand and scrap sales, GFMS said.

But a sharp correction is in store further ahead when inflation fails to run away and the U.S. dollar escapes a dollar-crisis as some predict, it said.

"(Investment) demand will begin to wane as real interest rates rise and the safe haven properties of gold become less relevant under a more stable economic environment."

GFMS said investment demand last year surpassed jewelry demand for the first time since 1980, with jewelry demand accounting for just 43% of global gold mine production.

While jewelry demand has recovered in 2010 from last year's "exceptionally" low levels, prices will have to fall sharply to bring gold's traditional buyers back to the market and slow scrap gold sales, the group said.

"In the absence of another source of bullion demand emerging (such as central bank buying) ... the price would have to fall considerably to stimulate a sustainable recovery in jewelry demand."