China and India are seen underpinning massive growth in jewellery demand in the next decade as families accumulate the wealth to become significant buyers, creating up to a billion new consumers of the precious metal.
Demand for gold fell in the second quarter of the year, according to the World Gold Council, but its draw as a hedge against inflation and overall economic turbulence is still likely to drive it to a 12th straight bull year.
The council's quarterly report on gold trends, to be released Thursday, showed demand for the metal slipped 7 per cent in the quarter, dragged down by flat demand for exchange traded funds and a 38-per-cent drop in purchases from India, the world's largest consumer.
Demand in the jewellery sector was 15-per-cent lower in the quarter and investment demand fell 23 per cent year on year.
But those figures, including a 7-per-cent drop in demand from No. 2 consumer China, were hugely offset by central bank buying at levels not seen since the 1960s, with the end of the gold standard.
"If you look at the price behaviour this year, our view is that its likely we will see a 12th straight year of the bull market," said Marcus Grubb, the group's managing director for investment.
Gold prices are above $1,600 (U.S.) an ounce, back from levels as low as $1,540 an ounce in May as economic turbulence built in Europe on the back of uncertainties in Greece and elsewhere.
They started the year at about $1,545 an ounce, or about six times where they were in mid-1999, when gold was trading at $252 an ounce.
"When we look forward into the second half of this year, there are a great many unanswered questions that could potentially be positive for the gold market in terms of the future of the euro zone and also I think in North America," Mr. Grubb said.
On Wednesday, gold prices rose amid new optimism the U.S. Federal Reserve could return to quantitative easing as it moves to spur growth on the heels of stagnant consumer prices data.
Fed Chairman Ben Bernanke dampened such speculation during testimony to the U.S. Congress on Feb. 29, when gold prices plunged.
Gold prices will also get bumped higher toward the end of the year because central banks, in emerging nations in particular, favour it as a safer investment than sovereign debt, as investors regain their appetite for exchange traded funds and China and India buy more gold for jewellery.
The two countries are seen underpinning massive growth in jewellery demand in the next decade as families accumulate the wealth to become significant buyers, creating up to a billion new consumers of the precious metal.
The World Gold Council estimated that China would overtake India as the world's largest consumer this year for the first time ever on an annual basis.
"So our view is you could have two things that come together in the second half, a seasonally stronger period for gold as usual, and then these big macro factors that are just starting to percolate under the surface now, which is why gold is breaking up through $1,600 per ounce again," Mr. Grubb said.
He pointed at physical demand for ETFs that hit all-time highs in August.
Reports on Wednesday showed billionaire investor John Paulson raised his stake in an exchange traded fund as he sold other stocks in the second quarter.
"So something is starting to move, and therefore we are in the camp that says gold is going to have a much stronger second half this year," Mr. Grubb said.