GOLD bulls predict that the price of the precious metal will return to its 25-year-old all-time high of $850 an ounce in the next few years, despite a heavy sell-off last week.

The gold price has gained nearly 16% so far this year and touched a high of $540 on Monday, before plunging to $508 by the end of the week because of heavy selling in Japan.

However, many analysts think the pullback will prove temporary and the gold price will rally further next year, possibly even regaining the nominal peak of $850 that it achieved in January 1980, when markets were in the grip of a global inflation scare. However, $850 then was worth about $2,500 in today’s terms.

Paul Walker of GFMS, a metals consultancy, said: “We think the rally can continue for some time. There are such big imbalances in the American economy that US assets are seen as too risky and investors are seeking alternatives such as gold. I can imagine circumstances over the next 12 to 18 months in which these imbalances prevail, the dollar falls dramatically and the subsequent flow of funds into gold takes it to the nominal peak seen in 1980.”

Greg Smith at Fat Prophets, an independent consultant, also thinks a weaker dollar could push gold above $850, but not until 2007. His forecast for next year is $680 to $700 — about a third above current levels.

He said: “We think last week’s pullback should be seen as a short-term aberration in a longer-term uptrend. We forecast that gold will hit $850 an ounce in 18 to 24 months. The final piece of the puzzle will be the weakening of the US dollar — cracks are starting to show.”

Figures out last week revealed that the American trade gap hit a record high of $68.9 billion (£39 billion) in October, which puts pressure on the dollar because the country imports so much more than it exports.

Pierre Lassonde at Newmont Mining, the world’s largest gold producer, has even said the gold price could hit $1,000 in five to seven years. That would make it as expensive as platinum. However, some analysts say the gold market has got ahead of itself.

Paul Merrick of RBC Capital Markets, an investment bank, said: “Gold rose $50 in the first 12 days of December, which is nearly unprecedented. It has happened before only in extreme conditions such as war. The sell-off last week was therefore a return to market sanity.”

The Japanese have been blamed for the spike. They piled into gold this month as an alternative to the weaker yen, only to be caught out when their currency strengthened against the dollar last week. This led to a rush for the exit and a subsequent drop in the price.

But most analysts do not think the pullback is the start of a more sinister downturn. They point to many factors that will prop up the price next year, particularly strong demand, tight supply and political tensions.

Demand for gold, primarily for jewellery, is about 12% higher than last year, while supply is flat or in decline, according to Merrick. He also points to strong investment demand from the Middle East and China. “The Middle East, which is awash with cash thanks to the high oil price, is proving to be an enthusiastic buyer of gold, with Dubai becoming a major centre following the recent establishment of a futures market,” he said.

“China is also becoming an eager buyer, as the country with the fourth-highest consumption in 2004. Regulations on the ownership of gold have been relaxed there over the past decade, and the potential for growth is enormous.”