Gold mine in Indonesia

Jan 13 - Gold could rally to record highs above $1,600 an ounce late this year or early 2012 as safe-haven concerns fueled investment demand, respected metals consultancy GFMS Ltd said on Thursday.

The official sector, which includes central banks and monetary authorities, swung into net purchases last year for the first time since 1988, as increased buying in emerging markets more than offset gold sales by European central banks, GFMS said in its closely watched Gold Survey 2010 Update.

"We have, obviously, safe-haven concerns regarding the valuation of the major currencies, and interest rates will likely remain low throughout this year," Philip Klapwijk, GFMS chairman, told Reuters prior to the release of the survey.

Klapwijk said the sovereign debt crisis in Europe could spread to the United States, as the world's largest economy has used loose monetary policy and massive budget deficits to stimulate economic recovery.

"I think that at some point, this could start to call into question of its Triple-A bond rating," which would significantly buoy bullion's safe-haven buying, Klapwijk said.

Investors often turn to gold and sell paper currencies in times of geopolitical tensions and economic crises due to bullion's intrinsic value.

Last week, gold notched its biggest weekly loss in seven months as signs of an improving economy prompted bullion investors to take profits following last year's nearly 30 percent gain.

Spot gold XAU= traded at $1,385 an ounce on Thursday, 3 percent below its all-time high of $1,430.95 set on Dec. 7.

"There is scope for a further correction in prices ... particularly once new-year restocking is out of the way, once the run-up to Chinese New Year is out of the way," Klapwijk said at a presentation in Toronto on Thursday.

Klapwijk said, however, he does not expect a major sell-off or change in direction for bullion prices.

SCRAP SUPPLY FALLS, JEWELRY WEAK

World mine production rose about 3 percent to 2,652 tonnes, a record high last year, surpassing a previous peak set in 2001, as several large-scale mines began or ramped up production.

Klapwijk said that much of last year's growth originated from Australia, China, Argentina and the United States, despite declines at massive mines including Peru's Yanacocha and Indonesia's Grasberg, the world's largest gold and No. 3 copper mine.

Scrap gold supply fell 1 percent to 1,654 tonnes last year despite a 30 percent price rally.

Klapwijk said that a fairly significant decline in scrap supply from Middle East and drop in India and East Asia more than offset gains from Europe and North America.

"We are seeing expectations of still higher prices leading to a retention of possible scrap and sellers waiting for better prices," Klapwijk said.

In 2010, gold jewelry fabrication increased 16 percent, largely driven by a surge from India, the world's largest gold consumer. However, GFMS is forecasting a 7 percent decline in the first half of this year.

"We feel that there has been quite a significant amount of stock build in India and that we will see demand moderate somewhat over the first two quarters of this year," Klapwijk said.

"The combination of sluggish economic growth of the industrial world coupled with high gold prices will strain jewelry demand this year. In fact, jewelry demand should decline a bit in 2011 versus 2010," he said.

Gold jewelry buying traditionally represents about 60 percent of total demand, supported by perennial top consuming countries such as India and China. In 2010, it stood at 47 percent of global demand. (Editing by Lisa Shumaker)

By Julie Gordon and Frank Tang