UPDATE 1-GFMS sees gold averaging $915/oz in first half

TORONTO, Jan 15 (Reuters) - The price of gold could revisit its record high above $1,000 an ounce by the end of June as government fiscal stimulus efforts undermine the greenback and set the stage for a sharp runup in inflation, precious metals consultancy firm GFMS said on Thursday.

The London-based company said in an update to its Gold Survey 2008 that it expects the price of gold to average $915 an ounce in the first half of 2009, up from last year's average of $871.96, and much higher than the metal's current level around $810 an ounce.

Gold hit a record high of $1,023.50 last March, based on London's morning gold fix, GFMS said. Spot gold <XAU=> hit a record peak of $1,030.80 on an intraday basis on March 17.

It then fell sharply as the global economic slowdown and financial crisis hit jewelry demand and prompted many investors to liquidate their gold holdings to cover other losses.

Such liquidations could continue this year, but should be overcome by both a weaker U.S. dollar and increased buying by investors worried about the inflationary risks of the billions of dollars being pumped into the financial system by governments, particularly the United States.

Massive debt taken on by the U.S. government could force the Fed to turn to "quantitative easing" -- essentially printing money to cover the debt -- which will further boost money supply, and prompt investors to turn to gold as a hedge against inflation, the firm said.

"As investors start to focus on the likely consequences of this policy, gold will almost certainly benefit handsomely, especially as some of the alternatives to American government debt and the dollar, such as the euro and yen, face their own issues," GFMS said in a statement.

Such demand could push gold back above last year's record high by the midpoint of the year, it said, although the metal will likely see volatile trading over the next few months, and could also fall to the mid $750s before rebounding.

LOWER JEWELRY DEMAND, FLAT SUPPLY

The investment appeal of the metal should overshadow a continued retreat in jewelry demand, which dropped 10.9 percent to 2,139 tonnes last year, its lowest level since 1989, due largely to high gold prices early in 2008, and weakening economic growth later in the year.

Economic worries should continue to shrink demand in 2009, GFMS said, with an 11.1 percent year-over-year drop expected in the first half of the year.

Also eroding the demand side will be lower producer de-hedging, which is expected to fall 82.3 percent in early 2009 after a 22.6 percent drop last year.

The supply side of the equation, meanwhile, should have little impact on the price, as it should stay relatively flat in the first half of 2009 following a 4.1 percent drop last year, GFMS said.

Mine output dropped 3.6 percent to 2,385 tonnes, while recycled gold scrap climbed 13.4 percent to 1,108 tonnes, and central bank sales plunged 42.5 percent to 279 tonnes.

Production last year was hurt by a sharp drop in Indonesia, due to lower output at Freeport-McMoran's (FCX.N) massive Grasberg mine, as well as more modest declines in Australia and South Africa on technical and ore grade issues.

Few new mines opened to pick up the slack, with the one notable exception being Kinross Gold's (K.TO) Kupol mine in Russia, while China solidified its status as the top gold producing nation with a 3 percent increase.

South Africa, once the world's dominant producer, slipped to No. 3 behind China and the United States.

Many miners have canceled or postponed projects due to funding constraints, and this should continue, GFMS said.

"Looking ahead, the global credit crisis will have a pronounced negative impact on project finance and development, most markedly among the junior developers that do not have established cash flow to support project finance programs," it said.

Overall gold supply is seen dropping 0.6 percent in the first half of 2009 to 1,888 tonnes, as a 2.6 percent gain in mine production is offset by a 23.4 percent drop in central bank sales. (Reporting by Cameron French; editing by Peter Galloway)