The price of gold will exceed US$500 an ounce during the first half of 2006, GFMS Ltd., a London-based precious metals research group predicts.

Bullion, which reached a 16-year high of US$458.70 last Dec. 2, rose US$3.70 an ounce yesterday to US$449.80, helping to lift the S&P/TSX gold index 8.09 points to 216.20.

The demand for gold stems from a greater worldwide demand for jewellery, and a desire by investors to hedge against inflation, a weaker U.S. dollar caused by U.S. trade and budget deficits and slower growth globally, GFMS said. The high price of oil and gas is also heightening inflation anxiety, it said.

GFMS forecasts that gold fabrication in jewellery and other industrial uses such as the manufacture of coins will rise by 6.8% this year to a four-year high.

Although the price of gold is up about 7% year-over-year in U.S. dollar terms, the price rise as measured in a number of other currencies such as India’s rupee has been modest, GFMS said. Demand for gold used in jewellery is particularly price sensitive in India.

Demand was strong in India, the Middle East, Turkey and China. Europe was the only major region to see a first-half decline in jewellery demand, mostly because of weaker Italian exports.

However, GFMS said that if its bullish forecast for gold proves to be accurate – it expects bullion could increase to $480 an ounce in the fourth quarter – jewellery fabrication could decline 1% year-over-year.

The low interest rate environment has helped make gold more attractive as an investment, it said.