Gold may rise through $1,100 an ounce in 2009 as investment is supported by fears over rising inflation, potential dollar weakness and fears over financial instability, metals consultancy GFMS said on Tuesday.

In its closely watched Gold Survey 2009, the company said an investor-led rally to 'well above' $1,000 an ounce is 'quite probable' and a breach of $1,100 'cannot be discounted.'    

'The adoption of fiscal and monetary measures that we can place under the umbrella of quantitative easing creates an air of uncertainty that should support assets with safe-haven qualities,' GFMS said in its annual report.

'Nor can we ignore what this could ultimately do to the value of the dollar,' it said. A weaker dollar typically supports gold, which is often bought as an alternative asset to the US currency.

Inflation 'also needs to be taken into account', it added. 'We may still be flirting with deflation in certain regions but that could well change,' it said. Spot gold is currently just above $875 an ounce.

Prices have dipped 13 percent from the 2009 high of $1,005.40 they reached in February, as a recovery in equities, weak jewellery demand, and hopes the economic downturn may be bottoming hurt prices.

In 2008, overall gold demand fell to 3,880 tonnes from 3,920 tonnes the previous year, GFMS said in its report. Jewellery buying in particular suffered from high and volatile prices, slipping 245 tonnes or 10 percent to 2,159 tonnes last year.

Producer dehedging also slowed, contributing 358 tonnes to physical demand last year, against 444 tonnes in 2007.

An uptick in other sources of demand partially offset this.

Implied net investment, which includes buying of gold to back exchange-traded funds, rose 124 tonnes or 76 percent to 288 tonnes, while bar hoarding rose 148 tonnes or 63 percent.

GFMS said the increase in demand for physical gold reflected a growing distrust of institutions. It said in 2008 offical coin minting rose 40 percent, chiefly in the United States, Canada and Austria, while bar hoarding was up 62 percent.

On the supply side, total supply fell 40 tonnes to 3,880 tonnes in 2008 from a year earlier. Supply of scrap gold surged, however, to record highs. Scrap supply rose 260 tonnes or 27 percent to 1,218 tonnes as high prices prompted selling.

Mine output continued the downward trend it has shown since 2006, with production down 62 tonnes to 2,416 tonnes.

Indonesia saw the sharpest drop in output, which fell 52 tonnes, largely due to a production drop at the Grasberg copper-gold operation.

South African supply dropped 37 tonnes, with power rationing by state electricity company Eskom and new safety legislation contributing to the fall.

GFMS said global financial turmoil was likely to depress production further. 'The financial crisis will undoubtedly have negative implications in coming years as the funding gap in project and exploration expenditure begins to filter through,' it said.

Official sector sales by central banks fell 238 tonnes or nearly half to 246 tonnes, GFMS added.  -Reuters