DUBAI - Gold prices, which have rallied sharply in recent weeks on sovereign risk concerns, may be vulnerable to a sharp correction when the fear factor dies down, Deutsche Bank's global head of metals told Reuters.

Over the past two years, investors seeking a safe haven from the global economic uncertainty shifted their investments to physical and gold securities.

However, the precious metal is likely to lose its lustre when economic growth recovers and confidence in governments' ability to repay debt grows, said Raymond Key on the sidelines of an industry event in Dubai.

In three or four years, the extent of the uncertainly in the market might decrease and this would lead to the dramatic downfall of gold investments, he said.

Gold does not return any dividend like other assets, so if faith returns in the global economy we will start to see a move away from gold, he added.

Spot gold XAU= rallied nearly 6 percent in April as concern over Greece's ability to deal with its debts sent investors flocking to bullion. On Tuesday it traded above $1,190 an ounce for the first time since December last year.

Persistent fears over the euro zone's fiscal health, which was recently sparked by Greece's sovereign debt problems, had kept gold in a sweet spot, said Key.

For the time being I think gold will remain strong, because there are no clear indications of government debt recovery, he said.

A German government source said Greece's capital requirements until 2012 are greater than the 110 billion euros included in a euro zone and IMF rescue package. [ID:nBAT005393]

Looking forward, the prolonged dollar strength on the back of the resilient United States economy is likely to limit sustained gains in gold, said Pradeep Unni, senior analyst and trader at Richcomm Global Services in Dubai.

As these (European) economies recover on the back of bailouts by the euro-zone block and the IMF, risk must get offloaded from gold which could drag the metal down in that process, he said.

It's almost evident that key economies starting from the U.S. would be compelled to raise the interest rates which have been purposely kept lower to trigger economic recovery... when growth turns to normalcy, rate hikes are imminent, he added.


In the Middle East, retail demand holds the lion's share of the gold market, and if the price of the metal eases then demand is expected to pick up, retailers said.

The global jewellery industry is valued at approximately $146 billion of which the Gulf region represents around 10 percent with a value of $14.5 billion, said Chandu Siroya, vice chairman of the Dubai Gold and Jewellery Group, an industry body which represents more than 800 retailers.

Sales in of gold in Dubai during the first quarter of this year have increased by around 25 percent compared to the same time last year and if the prices ease this would further improve, he said. (Reporting by Amena Bakr; Editing by William Hardy)