BEIJING, June 7 -- Gold prices may challenge record highs in the next three years as higher inflation prompts investors to buy the precious metal as a hedge, according to Citigroup Inc, the world's biggest financial services company.

    "We have been positive on gold for three years and expect it to ratchet much, much higher over time," Citigroup analyst John Hill said in a report. "We would not be surprised to see a test of the old highs of US$850 an ounce."

    Gold for immediate delivery may average US$632 an ounce within this year, compared with US$445.39 last year, Hill said.

    The forecast is 14 percent higher than the bank's earlier prediction. The precious metal will average US$700 next year and US$750 in 2008.

    The precious metal climbed to a 26-year high of US$730.40 an ounce last month after the US Federal Reserve signaled concern about rising prices. Fed Chairman Ben S. Bernanke said on Monday recent increases in measures of inflation "are unwelcome" and he will ensure the trend isn't sustained. Gold rose to a record US$850 an ounce in January 1980. In today's US dollars, that price equals almost US$2,100. The precious metal fell US$5.78, or 0.9 percent, to US$631.38 early yesterday.

    Bullion has fallen 13 percent since May 12 as funds and large speculators cut holdings after the metal rose by almost US$200 an ounce from December 31 to mid-May.

    Price movements up and down over the past 50 days are at the highest in 5 1/2 years.

    The precious metal's 50-day volatility, a measure of how far each day's closing price deviated from the period's average closing price, was at 31.33 in Sydney yesterday. It rose to 31.38 on Friday, the highest since December 2, 1999.

    "Following the current period of volatility and instability we expect investors to refocus on the previous concerns of continuing high oil prices leading to higher inflation," Citigroup's Sydney-based analysts Jonathan Battershill and Brian Warner said in a report.

    The higher price forecasts have led Citigroup's Hill to upgrade earnings estimates for Barrick Gold Corp, the world's biggest miner of bullion.

    Shares of the Toronto-based miner may reach C$44 (US$39.45), from Citigroup's previous target of C$40, Hill said in a report. He is keeping his "buy" recommendation.

    Hill upgraded his call on Newmont Mining Corp to "buy" from "hold" while raising his target share price for the stock to US$75 from US$57. Earnings per share for the world's second-biggest gold miner this year are estimated at US$2.11, from US$1.29, he said.

    Earnings per share estimates at Freeport-McMoRan Copper & Gold Inc, which operates the world's second-biggest copper mine in Indonesia, for this year were cut 7 percent to US$6.32 and its target price was reduced to US$63 from US$76.

    Citigroup's analysts based in Sydney increased their estimates of net earnings for Australian gold mining companies which include Lihir Gold Ltd, Newcrest Mining Ltd and Oxiana Ltd.

    (Source: Shanghai Daily)