Physical gold demand slides to 7-year low in 2016 -GFMS

* Physical gold demand slides 20 pct to 3,349 T in 2016
    * Gold market surplus biggest this century
    * GFMS forecasts gold at $1,259/oz in 2017

    By Jan Harvey
    LONDON, Jan 26 (Reuters) - Physical gold demand fell 20
percent last year to its lowest since 2009, GFMS analysts at
Thomson Reuters said in a report on Thursday, as a rebound in
prices after three straight years of losses blunted appetite for
the metal.  
    Buying of jewellery, coins and bars, plus official sector
and industrial demand, fell to 3,349 tonnes last year from 4,184
tonnes in 2015, the analysts said, the lowest in seven years.
    That helped lift the net surplus in the gold market to 1,176
tonnes, up from just 220 tonnes in 2015 and the biggest physical
surplus this century.
    Demand was hurt towards the year-end by gains in the dollar
and a sharp drop in Indian demand after Prime Minister Narendra
Modi's withdrawal of some denominations of bank notes sparked a
cash crunch in the fourth quarter.
    "The U.S. dollar is likely to remain a substantial headwind
to further price rises, at least in the first half of 2017," it
said. "Furthermore, there are few indications that physical
demand from Asia is set to pick up just yet."
    Political tensions linked to the new Trump presidency in the
United States, the progress of Britain's departure from the
European Union, and a host of elections in Europe may spark
renewed gold demand later in the year.
    That led GFMS to forecast gold prices averaging at
$1,259 an ounce in 2017.
    The gold market saw its largest surplus since 2005 in the
final quarter of last year, as demand from major consumer India
wilted and investors sold out of gold-backed exchange-traded
    Indian gold demand slid to its lowest since 2003 last year
at 580 tonnes, down by one third year-on-year. Jewellery demand
in China, the world's biggest consumer of the precious metal,
fell 15 percent in the last quarter to 146.6 tonnes. 
    Global jewellery fabrication, the largest single demand
segment for the metal, fell by more than one fifth last year,
while central bank buying slipped 42 percent to 252 tonnes.
    Retail investment fell 12 percent to 986 tonnes in the full
year, but rose 6 percent in the final quarter. North American
retail investment rose by nearly one third in the last three
months of the year, with U.S. buying rising 27 percent.
    "We estimate retail demand will pick up in the beginning of
2017, mainly driven by a revival of physical bar demand," the
GFMS report said. "With the inauguration of Mr Trump as
president, more uncertainties may emerge on the horizon."
    Mine supply fell 1.5 percent, but this was offset by a 10
percent rise in recycling and an increase in net hedging supply
to 78 tonnes from just 21 tonnes in 2015.
                             2015      2016  Pct change
 Mine production            3,216     3,168         -1.5
 Scrap                      1,165     1,280          9.9
 Net hedging supply            21        78        271.4
 TOTAL SUPPLY               4,404     4,525          2.7
 Jewellery fabrication      2,271     1,775        -21.8
 Industrial fabrication       362       336         -7.2
 Official sector demand       437       252        -42.3
 Retail investment          1,115       986        -11.6
 Physical demand            4,184     3,349        -20.0
 Surplus/deficit              220     1,176        434.5
 ETF inventory build         -125       523          n/a
 Exchange inventory build     -49        86          n/a
 Net balance                  392       569         45.2
    *Source: GFMS Gold Survey 2016 Q4 Update & Outlook

 (Reporting by Jan Harvey, editing by David Evans)