LONDON 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.
Fundamental factors also fed into the decline.
Jewellery fabrication, the largest single section of demand, fell 3 percent year-on-year, GFMS said in the latest update to its Gold Survey 2015 on Tuesday, while retail investment eased 2 percent and industrial fabrication fell by 4 percent.
Meanwhile, output from mines and recycling edged higher, though supply from hedging activity eased into negative territory.
"The final quarter of 2015 marked the sixth quarter of the past seven in which the gold market was in surplus, and tied to this backdrop it is unsurprising that the bear market continued," GFMS said in the report.
However, there are reasons for being optimistic for the future, it added. Mine supply is set to keep falling after posting its largest quarterly decline since 2008 in the last quarter, while lower prices are expected to stimulate retail demand, and central bank buying will remain supportive.
Quarterly figures suggest demand rose toward the end of last year. Demand in China jumped by nearly a quarter in the last three months of 2015, reaching its highest since 2013 on concerns over slowing economic growth and lower prices.
Falling prices and festival-related demand also lifted Indian jewellery consumption to its highest since the third quarter of 2008, up 14 percent year-on-year to 204 tonnes.
Overall jewellery buying fell 2 percent in the fourth quarter, however, though an increase in official-sector buying and a rise in retail investment led overall demand to rise 2 percent.
(Reporting by Jan Harvey; Editing by Pratima Desai and Dale Hudson)