By Atul Prakash

LONDON, Apr 12 (Reuters) Gold has tremendous scope to attract more investment that could push prices past a 1980 peak of 0/oz in the next couple of years, due to economic and geopolitical uncertainty, consultancy GFMS said on Wednesday.

GFMS said in its Gold Survey 2006 that generally bullish sentiment towards the metal was the prime driver of the growth in investor interest in the sector.

''This is not a rally being driven by fundamentals.

Essentially, it's being driven by the weight of money that's coming into the market from the investors,'' GFMS chairman Philip Klapwijk told Reuters.

''I think that flow will not cease or reverse. It will probably increase. Prices are set to go higher.'' Rising energy prices fuelling inflationary expectations, the possibility of a severe economic slowdown next year, growing tension in the Middle East and the threat of global terrorism would remain positive factors of gold, the report said.

''Levels safely over 0 are now in our sights and further hefty gains over the next year or two are quite possible. In the right circumstances, the 1980 high of 0 could even be taken out,'' Klapwijk said in a statement.

Spot gold surged to a 25-year high of 4 an ounce on Tuesday before retreating. It has gained more than 40 percent in the past 12 months, including a 16 percent rise this year.

Gold was benefiting from a rise in investor interest in commodities as an alternative asset to stocks, bonds and cash.

There was scope for further inflows from longer-term investors such as pension funds, the report said.

GFMS said jewellery fabrication demand rose by about 4 percent to 2,712 tonnes in 2005 from the previous year despite higher gold prices. But almost the entire gain came in the first half of 2005 and the last quarter saw a sharp drop.

The rise mainly came from the Indian subcontinent and the Middle East as the regions added about 100 tonnes in 2005. The weakness in jewellery fabrication has continued in 2006 because of high prices, combined with increased volatility.

''Given that GFMS expects gold prices to rally, jewellery (demand) is likely to weaken still further,'' Klapwijk said.

In Italy, jewellery fabrication fell 10 perecnt to 275 tonnes in 2005, the lowest level since 1988.

SCRAP GOLD INCREASE The survey noted that scrap flows rose only by 1.5 percent to 861 tonnes in 2005, as many people anticipated price hikes.

But the first quarter of 2006 witnessed extremely buoyant sales as prices have been too tempting.

''And now we are looking at 0 gold, all the signs are that another wave of scrap is coming through,'' the report said.

Global mine output rose by two percent to 2,519 tonnes in 2005 from a year earlier due to increased production at two leading mines and the start of operations at some new units. But the largest annual drop occurred in South Africa and Canada.

Output was seen rising further this year as some units were seen ramping up to full capacity and new mines starting in 2006, the report said.

Producer dehedging slowed to 131 tonnes in 2005 from a record 427 tonnes the previous year. GFMS estimated dehedging in a range of 200 to 300 tonnes in 2006.

The report said net gold sales by central banks surged by 40 percent to a record 656 tonnes in 2005 mainly due to more sales from signatories to the Central Bank Gold Agreement. About 41 percent of the total was offloaded in the first quarter.

''Overall, the apparent 'anti-gold' sentiment within the official sector community that had grown during the 1990s seemed to be moderating, if not fading away. This development helped to underpin the rally in the price during the fourth quarter.'' The sales figure dropped sharply in the January-March quarter of 2006 and net sales during the rest of the year was likely to be lower than last year, the survey added.

REUTERS PV HT1745