gold comments from bullion association - interview

VICENZA, Italy, Jan 13 (Reuters) - Pension funds should

raise their long-term holdings of gold to diversify portfolios

and protect investments from global economic malaise and a

softer dollar, a senior gold industry official said on Monday.

"It would make sense for gold to come back into play as a

portfolio diversifier for those funds," Simon Weeks, chairman of

the London Bullion Market Association (LBMA), said on the

sidelines of the gem and jewellery fair in Vicenza, northern

Italy.

Not only would this benefit the funds, it could also bring

steady gains in the gold price which would lure more investors.

"We need to see some longer term money coming into the

market from the pension funds," he told Reuters.

The LBMA is the representative body for the London bullion

market which is the hub of the gold industry's over-the-counter

precious metals trading.

Weeks said that demand for gold as a longer term investment

should increase amid continuing global economic weakness fuelled

by a large U.S. budget deficit, a weak dollar, and expectations

of low interest rates over a long period.

"The warning signs would be continuing weak currency

environment, continuing low interest rate environment and,

unfortunately, further falls in the stock market," said Weeks.

He forecast a sustained rise in gold prices if pension funds

gradually raised their longer term gold holdings from current

low levels to around 15 percent of their portfolios.

"People need a steady move in prices, as opposed to

volatility in the underlying price, and that will also attract

more investors," Weeks said.

Gold's price rally was put on hold in European trading on

Monday as lower oil prices, a slight recovery in the fragile

dollar and late gains on Wall Street on Friday encouraged fund

selling, traders and analysts said.

Spot gold was trading at $353.75/4.45 an ounce at 1607 GMT,

lower than the $354.30/5.05 last quoted in New York on Friday.

Asked for his near-term forecast for gold prices, Weeks

said: "Near-term we need to have a slight retracement in the

price. We need to perhaps move back towards the $325-330 an

ounce area. I think the market should build a solid base for

further gains later in the year."

"I think we are in for a period of sustainable high prices,"

he added.

Weeks said economic fragility, rather than the possibility

of war in Iraq, was the main driver of the gold market.

"The notification that war may happen has been in the price

for quite some time," he said.

"The main driver for price activity at the moment is the

economic situation around the world."