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Photographer: Billy H.C. Kwok/Bloomberg Photographer: Billy H.C. Kwok/Bloomberg

Goldman Sachs Group Inc. said investors should diversify their long-term bond holdings with gold, citing “fear-driven demand” for the precious metal.

“Gold cannot fully replace government bonds in a portfolio, but the case to reallocate a portion of normal bond exposure to gold is as strong as ever,” Goldman analysts including Sabine Schels said in a note Friday. “We still see upside in gold as late cycle concerns and heightened political uncertainty will likely support investment demand” for bullion as a defensive asset.

The precious metal climbed to a six-year high in September as the Federal Reserve cut borrowing costs and the total pile of debt yielding less than zero climbed to a record $17 trillion, boosting the appeal of non-interest bearing gold.

Hedge funds and other large speculators boosted their bullish bets on the precious metal by 8.9% in the week ended Dec. 3, government data showed Friday. That’s the biggest gain since late September.

Gold has fallen more than 6% from the peak to close at $1,460.17 in the spot market Friday.

While Goldman said the correction on bullion prices has further room to run, the bank is still sticking to its forecast prices will climb to $1,600 over the next year.

— With assistance by Marvin G Perez

( Adds hedge fund position in fourth paragraph. )