Gold is gearing up for the start of a bear market cycle in 2014 after more than a decade of gains as consumer demand for jewellery, coins and bars declines and central bank buying plateaus, metals consultancy GFMS said.
GFMS still held out prospects for bullion to reach the mid-$1,800s an ounce later this year if a major event, such as a breakdown in negotiations over the U.S. debt ceiling, sparked bouts of investment buying.
But with economic stability expected after major turmoil in recent years, a longer-term decline is almost certainly on the cards, GFMS head of precious metals research, Neil Meader, said on Thursday.
“There’s arguably a clearer light at the end of the tunnel,” he said in reference to global economic conditions. “That could entail the start of a (gold) bear cycle in 2014.”
Spot gold was trading at $1,547.50 an ounce by 1153 GMT, having earlier hit a lowest since May 2012.
Meader said the market was unlikely to see a fresh rush of new investors.
“After four years of perfect conditions, the involvement coming through institutions like pension funds is really quite limited,” he said. “If they haven’t come through now, it’s difficult to see why they would, so the whole weight-of-money argument seems a bit saturated.”
The prospect of prolonged U.S. monetary easing, a lack of confidence the U.S. debt ceiling debate will reach a timely resolution and persistent concerns over euro zone debt are among the factors that might support prices, he said.
GFMS predicts gold will trade between $1,540 and $1,850 an ounce in 2013, with an average price of $1,735. This forecast would mean another rise in the annual average price from $1,668.98 in 2012 but it does not see a test of the previously forecast peak of $2,000.
“We will have to see a fresh macro-economic event that is not on the horizon for that $2,000 mark to materialize at this point,” Meader said.
The gap between the amount of gold mined and recycled and the quantity used to fabricate jewellery and other goods is expected to widen, Meader said.
“We expect ongoing modest growth in mine production and should also see an increase in scrap, while demand excluding investment is likely to fall.”
Central bank purchases, which last year hit their highest since the mid-1960s at 532 tonnes, may edge lower this year, GFMS said, forecasting buying of around 100 tonnes per quarter.
“The official sector buying is likely to stay high, but it may struggle to match last year’s volumes,” Meader said.
Central banks have turned from net sellers to net buyers in recent years in a bid to diversify reserves, with signatories to the Central Bank Gold Agreement (CBGA) selling only 5 tonnes of their annual allowed quota of 400 tonnes in 2012. The current five-year agreement will end in September 2014.
Meader said a return to net selling cannot be ruled out over the course of the following five years, meaning a new agreement is likely.
“You might find a situation in a couple of years, when the euro zone crisis has passed, that some of the banks will want to resume selling programmes. A couple of them are certainly still overweight gold,” he said. “CBGA sales will remain trivial in 2013, but we expect a renewal to the agreement in some form to give an area of certainty to the market.”
Jewellery buying is also expected to fall in 2013. Gold jewellery fabrication fell 4.2 percent in 2012 to 1,893 tonnes and is expected to post a similar percentage drop this year. Off-take from major consumer India fell 3.3 percent to 736 tonnes.
“Looking ahead, Indian jewellery fabrication is currently projected to drop by another 10 percent in the first half of this year, which would take volumes to a four-year low,” GFMS said. “Even so, India is likely to remain the number one consumer above China for the whole year, although there may be quarters when demand in India is smaller.”
Physical bar hoarding – the largest gold investment element by far – fell 17 percent to 998 tonnes from a record 1,198 tonnes in 2011, with Europe and India reporting particularly substantial falls.
“We would not be surprised to see a further decline in Western countries, where there are fewer investors likely to add more, as those traditionally involved in the market have largely satisfied their needs,” Meader said, adding that growth would have to come from countries such as India and China.
The pace of growth in retail investment in China is slowing, however, he said. “The growth in retail investment demand has slowed remarkably there.”
Exchange-traded funds (ETFs) increased their holdings by 12 percent or 279 tonnes to a record high of 2,691 tonnes last year. This year, holdings have declined nearly 150 tonnes in the first three months on fears that the Federal Reserve would end its bond-buying programme.