Gold hovered a hair below $1,000 an ounce on Friday, consolidating the biggest two-day gain since March after a mix of inflation anxiety, a retreat from risk assets and a technical break stoked renewed investor interest.

The biggest one-day percentage rise since March in the SPDR Gold Trust, the largest gold-backed exchange-traded fund, underscored the fresh burst of investor demand for a safety hedge against a halting economic recovery and the risk that this summer's stock market rally may be unsustainable.

Spot gold dipped 0.1 percent to $989 an ounce by 2:17 a.m. EDT, pausing after a 5 percent gain over the past two days pushed it to a six-month peak of $997.20 on Thursday.

U.S. gold futures for December delivery, now at $992.70, came even closer to four digits with a session peak of $999.50 per ounce on Thursday, putting it on course for its biggest weekly gain since late April.

Gold, traditionally a port of refuge during economic storms, broke out of two months of range-bound trade this week, with investors seeking out a fresh play after global share prices reversed course and a rally in other commodities stalled.

When the outlook is uncertain, money tends to flow to the market which is showing a clear trend ... in this case precious metals led by gold, sais Shuji Sugata, a manager at Mitsubishi Corp Futures & Securities. He said trend-following funds had jumped on the bullion bandwagon in the past days.

Although it has broken out of its $930-$970 channel, gold has yet to crest the four-digit mark for the first time since February, a mark that has proven repeatedly difficult to crack.

Bullion has failed to hold gains above the $985 a tonne mark all four times it has topped that level since marking a record $1,030.80 in March of 2008, and some warned it may do so again.

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It is quite possible that the gold price will breach the $1,000/oz level in the near term... However, we would not expect the gold price to hold there, Commonwealth Bank of Australia commodities analyst David Moore said in a report.

Rather, we expect the gold price to trend lower over the period to end-2009 and to continue to drift lower over the course of 2010 as investor interest wanes.

U.S. December gold futures last approached $1,000 on June 3, when the contract rose to a peak of $993.60 as gold's traditional inverse relationship with the dollar appeared to reassert itself, but it tumbled the next day in heavy profit-taking.

STOCK CORRELATION REVERSAL

Gold is also seen as a hedge against inflation, a factor that is gaining increasing prominence as central banks keep pumping money into the financial system to jolt the economy, although its latest action appeared more closely tied to stock markets, with the close summer correlation suddenly reversing this week.

For a graphic showing the gold/Dow Jones correlation click:

http://graphics.thomsonreuters.com/gfx/JLeff_20090409144248.jpg

Gold had a positive correlation with stocks for the last three months, but now that there are signs of weakness in stocks investors are turning to the metal in flight-to-quality buying, said Masayo Kondo, president of Fisco Commodity Ltd.

U.S. stocks fell for four days running before Thursday's late day rally snapped the losing streak <.N>, with U.S. retail sales in August coming in stronger than expected even if still down 2.9 percent on the year.

Regional stocks were mixed on Friday, with Japan's Nikkei average <.N225> edging down 0.3 percent in thin, see-saw trade with traders reluctant to buy ahead of key U.S. jobs data, while Chinese stocks rose 0.6 percent. <.T>

The key economic number this week comes up later on Friday when U.S. non-farm payrolls data is released, with employers expected to cut jobs by the smallest amount in a year.

Reflecting the recent rush of investor interest, the SPDR ETF said holdings rose 14.65 tonnes or 1.4 percent to 1,078.01 tonnes as of September 3, but were still off the peak 1,134.03 tonnes on June 1.

Investors lost interest in the fund for about a month from mid-July when holdings fell about 3 percent as worries about inflation eased.

(Additional reporting by Risa Maeda; Editing by Jonathan Leff)

Gold Investment Inflation