Gold demand fell 2 percent last year, GFMS analysts at Thomson Reuters said on Tuesday, but is set to recover in 2016 as U.S. rate hikes arrive more slowly than expected, while concerns over economic growth and yuan weakness stimulate Chinese buying.
In 2016 GFMS sees gold prices, currently near $1,100 an ounce, recovering to above $1,200 an ounce by year-end, and averaging $1,164 an ounce in the full year. Gold demand is expected to grow by 5 percent this year, it said.
Chinese consumers concerned about a falling yuan eroding their wealth may seek gold as an alternative store of value, GFMS said.
“Slowing Chinese growth and the negative outlook for the yuan should benefit gold in the medium term, and once there are clear signs of a price recovery, or at least a stabilization, we should see investors coming back into the market,” it said.
“Moreover, the market has been arguably pricing in four U.S. rate rises this year. However, given a weak economic recovery and highly accommodative stance of monetary policies outside the United States, we are likely to see only two small rises. This should again strengthen market sentiment.”
Gold tends to benefit from low interest rates, which cut the opportunity cost of holding non-yielding assets such as bullion, and weigh on the dollar, in which it is priced. Expectations for a Federal Reserve rate hike were a factor driving prices down 10 percent in 2015.