Gold prices will edge higher this year even in the face of a persistent surplus of physical metal, GFMS analysts at Thomson Reuters said on Friday, as jitters over the U.S. and European political backdrop drive investors to bullion.
Buying of gold as a haven from risk, plus a recovery in Indian buying, are likely to push prices to an average $1,259 an ounce this year, the team said in its Gold Survey 2017, up from $1,248 an ounce last year.
"As the year progresses … safe haven flows become increasingly likely, assisted by either U.S. or European politics or a combination thereof," GFMS said. "An anti-EU election result in one of the European nations could raise uncertainty over the prognosis for the euro, while an unorthodox approach from President Trump may bolster investment activity. The markets are also jittery as to whether U.S. equities have gone too far, and gold is expected to benefit from risk aversion."
That will likely support prices even in the face of persistent oversupply. The physical gold market surplus swelled to a seven-year high of 952 tonnes last year, GFMS said, and will likely persist in 2017, albeit at lower levels. Total physical demand fell 18 percent to 3,559 tonnes in 2016, largely due to sharply lower jewelry fabrication, it said.
Gold jewelry consumption slid by a fifth to a seven-year low. Of the two biggest physical gold markets, Indian jewelry fabrication fell 38 percent, due in part to the introduction of excise duty on jewelry manufacturing, while Chinese fabrication slid 17 percent.
Identifiable investment, which includes buying of coins, bars and exchange-traded funds, hit its highest since 2012 meanwhile at 1,579 tonnes, with a seven-year peak in ETF buying offsetting softer demand for coins and bars.
Central banks were net buyers of gold for a seventh year in 2016, though they bought the least since 2010, at 257 tonnes. GFMS forecast 250 tonnes of buying this year, with Russia continuing to drive purchases and China re-starting reserve building after four months of no changes to its holdings. GFMS expects mine supply to contract from this year onwards after hitting a record 3,222 tonnes in 2016.