The prime factors that will continue drive gold prices is the supply and demand fundamentals and oil price-driven inflation. "With no significant increase in mine supply, and a perceptible shortfall in gold selling by central banks combined with no growth in scrap gold supply, demand will continue to outstrip supply despite soaring prices," analysts said.

James Burton, Chief Executive Officer, World Gold Council (WGC), told Khaleej Times that world gold supply growth, which is expected to be almost flat, cannot cope with the rapidly increasing investment demand. "Growth in mine production in 2008 would be almost flat, increasing slightly by two per cent this year. "There are no major discoveries. We cannot expect the central banks which have agreed to an annual offloading of 500 tonnes of gold per year to keep their commitment due to the high volatility in prices," he said.

"On top of that, there has been no exceptional increase in scrap gold supply in the first two months of this year, which last year reached 900 tonnes," Burton pointed out.

Gold surged from a low of $601.90 in January 2007 to a high of $1009 recently. Industry experts predict gold prices would push past $1,100 an ounce in the coming months as  dollar continues to plunge while oil prices surge. They expect another record level of gold investment in 2008, driven by ongoing problems in the US, high oil price and instabilities in currencies.

As the impact of the US credit market crisis is being felt stronger than expected, Dubai-based yellow metal analysts are predicting a high of $1129, a low of $795, a year end price of $1046 and an average price for the year of $935. Some suggest that gold may hit a high of $1,180 an ounce and dipping as low as $870 an ounce, but averaging at $970.

The WGC chief said the 15 central banks, which agreed in 2005 to limit gold sales and gold lending to 500 tonnes a year for the next five years, account for 21,000 tonnes of reserves. Buying or selling of the metal by the banks can influence prices. "If they are not going to supply the market as committed, the shortfall would impact prices. With countries like Russia possibly looking to increase gold reserves, an overall reduction of gold coming into the market from this sector could be a positive factor," a Dubai-based analyst said.

Burton also ruled out any correlation between oil price spike and gold rally. "There is absolutely no link between these two. However, since higher oil prices spark inflation, investors tend turn to gold as a safer haven in greater numbers."

Analysts forecast that investment demand will remain high this year, projected to total 38.1 million ounces. In 2007, investors drove record inflows into gold exchange traded funds (ETFs), helping to push total demand to a new record of $20.7 billion in the September quarter, up 30 per cent from a year earlier.

He said gold demand in India and Middle East appeared to slow down due to record price rally, while offtake is growing in China.

Market watchers suggest that as financial markets jitters prevail in 2008, gold is tipped to breach $1,100 this year fuelled by fears of supply constraints, a weak US dollar and growing inflation fears.

Analysts said although supply and demand fundamentals generally do not play a big role in determining gold prices because of huge above-ground stocks, now estimated at around 158,000 tonnes — more than 60 times annual mine production — prices would continue to rally as investors sought a hedge against rising global inflation.

Total gold supply was reported to be 110.7 million ounces in 2007, up 6.2 per cent from 104.3 million ounces in 2006. According to most optimistic  projection gold supply will continue rising this year, increasing 2.8 per cent to 113.9 million ounces.  However, the cost of producing gold is now more than $700 per ounce, resulting in slimmer margins for producers.

Bullion traders said despite the proposed the sale of 403.3 tonnes of gold over the next few years by the International Monetary Fund (IMF) as part of a critical financial overhaul, the supply shortfall will continue to put upward pressure on gold prices. The sale, amounting to some 12 per cent of IMF gold reserves —  13 million ounces of the IMF's 103.4 million ounces of gold reserves —could yield around $11 billion.

Rising interest in commodities, including gold, from investment funds in recent years has been a major factor behind bullion's rally to historic highs. Gold's strong performance in recent years has attracted more players and increased inflows of money into the overall market.

According to precious metal experts, the currency market also plays a major role in setting the direction of gold, with bullion prices moving in the opposite direction to the US dollar. A weak US currency makes dollar-priced gold cheaper for holders of other currencies and vice versa.