Gold prices may extend their rally for at least another two to three years, supported by strong physical and investment demand, supply constraints and world political tensions, a fund manager said on Thursday.
"I don't see any reason why it shouldn't continue for two to three years...It will take a very long time for mine production to ramp up," Richard Davis, director of natural resources at Merrill Lynch Investment Managers, told Reuters.
Merrill Lynch's natural resources funds manage about $24 billion.
"It can take up to 10 years to build a mine. There is no quick fix in terms of bringing in a lot of supplies," he said on the sidelines of the European Gold Forum conference.
Gold prices have more than doubled in the past three years and surged by 25 percent so far in 2006 to hit a 25-year high of $645.75 an ounce this month.
"We are in a bull market for gold and the average for 2006 will be higher than the average in 2005, and the average for 2007 will be higher than 2006," Davis said.
Investors were increasingly attracted to gold because of high prices and the new vehicles, such as exchange-traded funds (ETFs), that offered them a convenient route into bullion.
"We have got very strong physical and investment demand for gold. People like to buy things that go up in value."
ETFs, backed by physical bullion, are traded on stock exchanges and track market prices. Investors buy a share of a fund, without taking physical delivery of the metal. Gold funds have so far accumulated nearly 500 tonnes of gold.
"Previously it was difficult to buy physical bullion." He said geopolitical factors were important for gold, which had historically been a store of value. It was also seen as a hedge against inflation.
"It's a much riskier place to live in now compared to 10 years ago."
Davis said gold prices were unlikely to fall significantly from here, adding: "I don't think we will see $400 again for some time."
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