By Kishori Krishnan Exclusive to Gold Investing News

Investment demand for physical gold remains strong as turmoil in the financial markets and fears over the outlook for the global economy boost the yellow metal’s appeal. Weakness in the banking sector, which saw Bank of America and Citigroup report large fourth quarter losses earlier on Friday, is increasing investor jitters and further supporting gold.

“The more problems we see in the banking sector and the financial sector in general, the more attractive gold as a hedge against such risk will be,” said Commerzbank analyst Eugen Weinberg. “Risk aversion is high. People are looking at gold right now as a real hedge against everything, an alternative asset,” he told Reuters.

At the futures market, the market price of gold was up nearly $33. The Comex February gold futures contract closed up $32.60 Friday at $839.90, trading between gold prices $815.70 and $843.60.

Even as U.S. President-elect Barack Obama aims to pass a stimulus plan of about $775 billion to help the world’s largest economy, gold is set to climb to a record in the first half as investors seek protection from dollar declines and possible inflation, according to precious metals researcher GFMS Ltd. The sentiment is underscored by governments selling more debt to fund bank bailouts and revive growth.

“The scale of the proposed stimuli raises a clear threat of significant inflation and, with its U.S. focus, the likelihood of dollar weakness,” London-based GFMS said in a report. A new all-time peak “is quite feasible during the first half.”

Gold prices this year should surge above 2008’s record levels, rising as high as $1,080 an ounce as government fiscal stimulus efforts weaken the U.S. dollar and fuel inflation. Gold rates could average $915 an ounce in the first half of 2009, up from last year’s average of $871.96, the GFMS’ report said. For the year, gold should trade in a range of $750 an ounce to $1,080 an ounce, which would put it above the record intraday high of $1,030.80 hit on March 17, 2008.

GFMS in its report on gold had forecast in September that gold would rally to $950 an ounce at the end of 2008, about $70 above actual year-end prices. The bull market may now be extended, with a peak higher than previously expected sometime in the first half, the report added.

Merrill Lynch Report

Alarmed by the state of the financial system and signs of political instability around the world, Merrill Lynch has revealed that some of its richest clients are now insisting on the purchase of gold bars, shunning derivatives. Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment.

“People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs,” he said, referring to exchange trade funds listed in London, New York, and other bourses. “They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands,” he said.

Merrill has predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June. The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value.

It’s a win-win situation. The change at the White House, ushering in Barack Obama, is also set to provide a much-needed psychological lift to sentiment. Analysts maintain that the nation’s economic woes are at least in part because of depressed sentiment among both consumers and businesses.

“I believe confidence is a critical factor in turning the panic and depression around,” said Joel Naroff of Naroff Economic Advisors. “With a new administration, there is a huge amount of goodwill that Obama has going into office. This provides the hope that aggressive, quick action coupled with his ability to rally the troops, can start changing perceptions and psychology.” Naroff said weak consumer and business sentiment has made what could have been a mild recession much worse.

“Even though they have the money, even though they will not likely lose their jobs or see their businesses fail, people are assuming the turtle position,” Naroff said. “They are hunkering down and cutting back to the bare minimum until they have some confidence that they will survive.”

Company News

Meanwhile, the Vancouver-based NovaGold Resources Inc. (TSX: NG) has rung in the New Year in a celebratory way, landing a substantial new investor. Following a run of tough luck starting up its new hard rock gold mine near Nome and related negative financial news in the later part of 2008, NovaGold has announced that it has entered into a definitive agreement with Electrum Strategic Resources LLC, a New York-based private metals investment company, to sell Electrum 46.1 million units of NovaGold at $1.30 for each share.

Upon closing, NovaGold will receive gross proceeds of roughly $60 million, and Electrum will become NovaGold’s largest shareholder, owning approximately 30 per cent of the issued and outstanding common shares of the company. “This is a strategic investment by a group that has a long term view,” Rick Van Nieuwenhuyse, NovaGold Resources president and CEO. NovaGold added that several other institutional investors agreed to purchase units with the same terms and price as Electrum, adding another $15 million to the financing secured by NovaGold.

The equity financing comes at a time when stock prices for junior gold exploration companies have plummeted, in some cases, much more dramatically than other publicly traded companies suffering from the recent global economic meltdown. Mining and exploration stocks began falling earlier in 2008, as metal prices began to decline and investor dollars dried up. Among that sector’s freefall was NovaGold, which reached a peak price of slightly more than $20 per share in November 2007. At its low several weeks ago, NovaGold was trading at about 50 cents per share. Following the news about the Electrum investment, the stock price bounced back to over $2 per share.

Gold deposits could take a beating with the world’s third largest mining giant Rio Tinto (RIO.L) suspending a $229 million development at an Australian copper and gold mine, citing the global financial crisis and falling commodity prices. The announcement follows the Anglo-Australian group’s decision to postpone the $2.15 billion expansion of its Corumba iron ore mine in Brazil due to the worldwide slowdown.