Gold prices are likely to head higher in 2007, benefiting from US interest rate cuts and increased demand for the metal from jewellers, National Australia Bank minerals and energy economist Gerard Burg said in a report.

The report forecasts gold to average 675 usd an ounce next year, up 11 pct over the expected average price of 606 usd for 2006.

'In 2007, gold prices are expected to rise further, particularly as the US Federal Reserve begins to cut interest rates in the second half of the year,' Burg said.

He said such cuts should provide increased incentives for gold investment, as gold's relative return improves in comparison with fixed interest assets, such as bonds.

But, Burg said, the path of prices over 2007 may be dependent on consumer demand, noting that the high volatility in gold prices in 2006 deterred jewellery consumers, particularly in price sensitive regions such as India and the Middle East.

Burg said perceptions about global political stability, particularly in the Middle East, inflation and economic growth prospects will also have an influence on gold markets, adding some uncertainty, but also potentially boosting investment demand.

NAB contends that an upward trend in gold prices will return following the weaker-than-expected performance of the metal over the past four months.

Burge noted the volume of speculative interest in gold markets, as represented by non-commercial positions on the COMEX, has fallen in recent months, in line with weaker price movements.

But, he said, speculative positions have resumed an upward trend since the start of November, supporting a price recovery.

As well, further price support should come from producers cutting forward sales by 357 tons in the first three quarters of 2006 with more to come, he said.

For the first 10 months of 2006, gold prices averaged 600 usd an ounce, a year-on- year increase of 38 pct. Since peaking in May, at over 720 usd an ounce, the metal fell back to 563 usd in early October before recovering to trade around 637 usd

For the first three quarters of 2006, end-user gold consumption decreased by around 13 pct to total 2455 metric tons.

Burg said the fall reflected a sharp decrease in jewellery consumption, which fell by 18 pct over the period.

Jewellery is the largest end-use sector for gold, accounting for over two-thirds of total consumption in the first three quarters of 2006.

Burg said despite strong gold prices, output has been slow to increase

'Under investment in exploration and development in the late 1990s, combined with rising costs for producers, has delayed new projects,' he said.

For the first three quarters of 2006, global gold output slipped by 2.1 pct to 1,804 metric tons.

Burg said gold production is forecast to increase modestly in 2007, with increased output in Australia and North and South America, more than offsetting declines elsewhere.

NAB is forecasting global output to rise 3.3 pct to 2,575 tons in calendar 2007 from 2006.