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Gold spot prices reached a record high of $1,290 Wednesday on fears that the global economic recovery is stalling.

However, analysts advised caution, saying that a gold bubble is forming - albeit not expected to burst anytime soon - with the price expected to reach $1,400 to $1,500 an ounce in the next one to two years.

"The recent meeting of the US Federal Reserve highlighted the worry that the inflation rate is too low, which is acting as the catalyst for inducing more capital flooding into the gold market," Anderson Cheung, deputy managing director of Mitsui Bussan Precious Metals (Hong Kong) Limited, told China Daily.

The US Federal Open Market Committee (FOMC) meeting on Tuesday stated for the first time that "inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate."

The statement added that it is "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate."

Mitsui Bussan's Cheung said that the market has taken this to mean that the US Federal Reserve will engage in additional monetary stimulus, perhaps lowering the US dollar further. He also said that the Federal Reserve feels inflation levels are far too low for its liking.

Looking ahead, Cheung predicted that the gold market may witness a correction to $1,250 per ounce but is likely to start rising again and hit $1,350 per ounce by the end of this year.

"With the US dollar falling, the prospects of an interest rate hike in the US is dim," said Cheung. "And with global equity markets still trading in a narrow range, capital will continue to pour into gold markets for asset protection."

He predicted gold will reach $1,400 to $1,500 per ounce in the next one to two years as the global economy is unlikely to greatly improve during this time span.

However, if gold prices reach this level, it will be a signal that gold is fundamentally overvalued, Cheung warned.

"A gold market bubble is forming, but the chance of it bursting soon is slim," he said. Catalysts at the $1,400 to $1,500 level would include appreciation of the US dollar, US interest rate hikes, or the improvement of the global equity market, he added.

Gold prices touched the psychological barrier of $1,000 per ounce in 2008 before retreating. But since the global economic crisis, gold prices have been above $1,000 per ounce since October 2009.

With the onset of the European debt crisis in 2010 and continued worries over the global economic recovery, the price of gold has skyrocketed to levels higher than $1,250 per ounce in recent months.

China Daily

(HK Edition 09/23/2010 page2)