Early 2014 the best time to buy gold
Doubts grow over the precious metal's allure as a medium-term investment as prices head for their biggest decline since 1981
Investors and consumers looking to take advantage of lower gold prices are advised to buy next quarter, with some analysts tipping prices to recover later, although they are set to post this year the biggest loss since 1981.
But some doubt the attractiveness of gold as a medium-term investment, saying its function as a hedge against inflation is likely to wane as interest rates increase after the US Federal Reserve starts its gradual withdrawal of ultra-stimulative monetary policies that resulted in near-zero interest rates.
Low interest rates encouraged gold buying as negative real interest rates - gross interest rates minus inflation - saw investors trim bank deposits and seek alternative investments to hedge wealth erosion by inflation.
This year, the price of gold was on track to record its first decline in 13 years on an annual average basis, said a research report by Germany's Commerzbank.
It has fallen about 27 per cent this year as investors, mostly Western ones, redeemed exchange-traded funds backed by more than 800 tonnes of gold in anticipation of the Fed's tapering of quantitative easing. The extra supply was absorbed primarily by Asians buying jewellery and investing in bars and coins, attracted by the lower prices.
Hong Kong is a key conduit for the import of gold into the mainland, and a sharp fall in gold price in the second quarter saw a buying frenzy by mainland tourists at Hong Kong's gold shops, which helped support a brief rebound.
Gold also lost its lustre this year as stock markets in developed nations soared to record levels amid low interest rates while inflation remained tame despite fears over ultra-low rates.
Prices dropped briefly below US$1,200 an ounce after the Fed announced on December 18 that it would cut its monthly bond purchases by US$10 billion to US$75 billion from January as the economy in the United States improved.
Commerzbank analysts forecast the price of gold would average US$1,300 next year, while those at Australia's ANZ tipped US$1,269 and Bank of America Merrill Lynch US$1,294. UBS and Standard Chartered's calls are a less optimistic US$1,200. The year-to-date average is US$1,413.
Gold price hovered below US$1,300 for most of the fourth quarter after falling to US$1,326 in the third from US$1,632 in the first.
Some expect it to recover some ground later next year, although room for more downside is seen in the first quarter.
Commerzbank analysts expected the price to rise to US$1,400 by the end of next year, while Bank of America Merrill Lynch tipped US$1,350. ANZ forecast a rebound to US$1,450 after dipping to US$1,150 in the first quarter.
Dominic Schnider, head of commodity research at UBS Wealth Management, sees more downside near term. He said it would be difficult to absorb 300 to 500 tonnes of new supply - 7 to 11 per cent of annual demand - from gold sales related to exchange-traded funds, futures and options next year, even at current low prices.
"Only a fall in the price of gold to marginal cash production costs of US$1,050 to US$1,150 would balance supply and demand," he wrote in a note.
Expectations of a recovery in prices later next year by Commerzbank and ANZ are based on the assumption that the redemption of exchange-traded funds will ease as the Fed gives more guidance on its policies, coupled with resilient Asian demand.
Commerzbank tipped the mainland's gold demand next year would roughly match this year's 1,000 tonnes, with the country overtaking India as the world's largest consumer due to high income and few investment alternatives.
It also expected consumer demand to recover in India next year after a 23 per cent year-on-year decline in the third quarter of this year following three duty increases to curb imports and rein in the country's large trade deficit.