Gold could surge as investors seek alternatives

By Pratima Desai

LONDON (Reuters) - Gold could once again surge above $1,000 an ounce as the dollar plummets and investors seek alternatives to stocks, bonds and bank deposits as well as protection from inflation.

The buzzword at the moment is deflation. But fund managers are convinced this will be short-lived and followed by a period of inflation that will erode the value of paper assets.

Spot gold hit a record $1,030.80 an ounce on March 17. It fell below $700 in late October, partly because investors sold their holdings to cover losses in equity and bond markets hit by the credit crisis. It is now around $830 an ounce.

The trigger for a break higher is likely to come from a much weaker dollar, making gold cheaper for holders of other currencies, as markets price in vast amounts of U.S. government borrowing to shore up the economy.

"The U.S. will have a debt crisis next year alongside a currency crisis. The dollar is on the verge of taking a complete dive," said David Murrin, chief investment officer at Emergent Asset Management.

Murrin added the repatriation trade, in which U.S. investors bring their money home and which has lifted the dollar in recent months, was mostly done.

"Gold will rally because it's a surrogate currency, I can see it reaching its highs within 16 months," he said.

Since October the precious metal has been sustained by institutional and retail purchases of gold coins and bullion either physically or through exchange traded commodity funds.