Gold to bottom out on low inflationary concerns

Gold prices are likely to bottom out between $1,170 and $1,200 in 2015 as the US economy slowly returns to normal and investors remain unconcerned about inflationary pressures, the GFMS team at Thomson Reuters said on Thursday.

Increased physical demand, after substantial declines in jewellery making from top consuming China and India in the first half, could provide some support to prices through 2015 but not a sufficient boost to counterbalance a persistent lack of investment interest in the West, GFMS said in its 2014 Interim Gold Report.

Prices are set to average $1,270 an ounce this year, down from $1,410 in 2013, when gold endured the first yearly loss after 12 years of gains. The metal stood at around $1,236 on Thursday, not far from the $1,200 level that GFMS sees as likely to be tested in coming weeks.

A stabilisation of economic and financial conditions in the United States has not been conducive to gold investment this year, but prices have however risen three percent so far on conflict in Ukraine and West Asia. "Without these risk factors, gold would already have tested $1,200 an ounce," GFMS's head of research Rhona O'Connell said. "Inflationary pressures are part of the argument for the much longer term ...if we go back to some kind of positive economic activity ...then there is bound to be a degree of concern about inflationary pressures just because of the amount of liquidity in the system."

O'Connell added that although difficult to predict, expectations for higher inflation should not materialise before a two year horizon.

Financial uncertainty from 2009 to 2012 pushed investors to seek security in assets perceived safe such as gold, but professional money has subsequently returned to higher-yield investments as expectations of higher interest rates in the United States started to increase.

Gold prices plummeted 28 per cent last year as investors sold out of investment products such as physically backed exchange-traded funds, which issue securities backed by physical gold.

These had proved a popular way to invest in bullion since their inception in 2003, but holdings fell by 880 tonnes of gold last year on expectations that the Federal Reserve would roll back its stimulus measures. Investors are likely to liquidate a further 125 tonnes of metal in 2014, GFMS said.

Physical gold buying, including jewellery, retail investment, bars and coins buying and changes in central banks' holdings, is set to fall by 15.9 per cent to 4,174 tonnes in 2014 from a record 4,957 tonnes last year. It fell by more than 26 per cent in the first half as consumers in price-sensitive Asian markets deferred buying in expectation of lower prices.