In an update to its Gold Survey 2013, Thomson Reuters GFMS said the market could beat a retreat below $1,300 towards the end of 2014 as U.S. monetary stimulus is withdrawn, fuelling talk of rising interest rates.
The consultancy expects prices to average $1,350 next year, down 7 per cent from $1,446 in 2013, with support seen between $1,200 and $1,250.
Markets are widely tipping the U.S. Federal Reserve to start tapering its $85 billion monthly bond-buying as early as this month.
"Although the Fed tapering has been priced in already by the gold market, that is not to say that you won't be getting a bit of a wobble as of when it is announced," Rhona O'Connell, head of metals research and forecasting said.
"And certainly one of the most important elements is that when they start talking about raising interest rates that is also likely to put some pressure on the market in terms of sentiment," she added.
The consultancy still held out for a positive start to next year, with geopolitical tensions and a possible breakdown in negotiations over the U.S. debt ceiling raising the possibility of a brief price rise to $1,500 in early 2014.
Gold prices have fallen by around a fifth this year, hitting a three-year low in June of $1,180.71 an ounce, after the Fed signalled it would start tapering its bond-buying programme by the end of the year, with an aim to withdraw it by mid-2014.
Prices are currently around $1,360, some $540 below their September 2011 record high of $1,920.30 an ounce.
PHYSICAL DEMAND FADES
GFMS remained cautious on physical demand growth, saying that exceptional levels seen in the first half were unlikely to be replicated in the coming months as inventories in traditional buying strongholds China and India had been replenished.
April's gold selloff - which saw spot prices slump $200 an ounce in two days in their sharpest slide in 30 years - and another retracement in June sent bar and coin demand to a record high of 725 tonnes, and jewellery fabrication to its strongest since 2007 at 1,137 tonnes in the first half of the year.
Thomson Reuters GFMS said first-half Chinese high-carat jewellery buying rose to 620 tonnes in the first six months of the year, against 500 tonnes for the full calendar year in 2012.
"China's physical demand is slowing down as gold prices rose from earlier lows and because there was so much buying between April and August that people already stocked up for the upcoming gifting season," O'Connell said.
"At the moment, we are looking at the second half of the year probably being some 80 percent of what the first half was."
China's gold market has grown at a blistering pace in recent years, helping fuel a rally in gold prices to a record $1,920.30 an ounce in 2011. The country is poised to overtake India's position as the top gold consumer by as much as 100 tonnes this year, GFMS said.
Indian jewellery fabrication jumped by 25 per cent in the first half to almost 350 tonnes. But demand is now expected to fall as the Indian government introduced a series of measures to curb gold imports, due to their contribution to the country's expanding trade deficit.
LOW INVESTOR APPETITE
Exchange-traded funds (ETFs), which issue securities backed by physical metal, lost 660 tonnes as of the end of August from a peak of 2,691 tonnes at the end of 2012 on Fed tapering expectations.
"The amount of gold that has come out of ETFs was more than enough to feed physical demand from Asia after the big price fall in the second quarter, which was too good an opportunity to miss for an awful lot of people from grassroots, retail, private individual purchasers," O'Connell said.
Net central bank buying fell by 32 per cent to 191 tonnes in the first half and is seen reaching 361 tonnes for the year, down from 445 tonnes in 2012, GFMS said.
On the supply side of the market, global mine production rose three per cent to 1,416 tonnes in the first six months and is expected to rise 0.8 percent to 1,501 tonnes in the second half. Scrap supply fell 14.3 percent to 662 tonnes in the same period and will continue to drop by 10.2 percent to 736 tonnes in the second half.
GFMS said producers remained net de-hedgers of gold in the first half of the year, with an increase of interest in establishing fresh hedge positions more than offset by several producers taking the fall in price as an opportunity to close out hedging contracts more cheaply and in some cases for profit.
Copyright Thomson Reuters 2013