Lombard Odier sees gold hitting record high

A one kilo gold bar is displayed in a shop in Dubai's gold souk, April 11, 2006.

LONDON (Reuters) - Gold has potential to set a record peak by December and the metal's average price is likely to be higher in 2010 than this year, as issues related to the credit crisis or inflation may resurface, a fund manager said.

Buying shares of precious metal companies, especially mid-cap gold miners, could yield attractive returns this year and next, said Aurele Storno, the manager of two funds at Switzerland-based Lombard Odier.

The LODH Invest -- World Gold Expertise fund and the LODH Multifonds -- Commodity fund manage a total of $270 million.

"We currently keep a defensive positioning in our commodity fund and wait for better entry points to profit from a potential new rebound over the coming six months," Storno told Reuters in an interview. "We also believe that the precious metals sector will do pretty well in the second half of the current year."

Storno said demand for gold has come back as people turn towards the precious metal to hedge against difficult economic conditions and the possible return of inflation.

"To us, it's a nice hedge in both the extreme scenarios. We are still living in a very volatile environment," he said.

But the gold price might not stay strong in the longer term and could fall significantly with an improvement in global economic conditions.

Spot gold surged to a record high above $1,030 an ounce in March 2008 and was quoted at around $928 on Wednesday.

INTERESTING PICK

Storno said gold mining equities were an interesting pick as profit margins of precious metal miners had improved following easing production costs, coupled with firm gold prices.

The gold fund yielded a return of 28 percent in the first half of 2009 against a slump of 38 percent in 2008. The commodity fund gave a return of 12 percent in the January-June period of the current year, against a drop of 50 percent the previous year.

Lombard's gold fund favours medium-sized gold miners as it sees more upside potential in their shares. Its top picks include Randgold Resources (RRS.L), Goldcorp (G.TO), Lihir Gold LGL.AX, IAMGold Corp (IMG.TO) and Eldorado Gold (ELD.TO).

Storno said he was underweight base metal equities and was not planning to change the portfolio in the near future.

"There is some lack of visibility. We will come back to pick base metal equities, but we are waiting for some more visibility on what China is doing with the inventory it built," he said.

Among base metals, copper's outlook appeared better because of more tight demand and supply conditions and low inventories compared to other metals, he added.

In contrast to its strategy related to gold miners, the commodity fund now prefers to invest in large, diversified base metal miners as they have more stable profit margins compared with small miners and have easy access to financing.

"There is a good case to go for diversified base metal companies as they are low-cost producers," Storno said, citing Freeport McMoran (FCX.N) as a good company in the sector.

(Editing by David Holmes)