Gold demand slumps in third quarter; U.S. election looms: GFMS

LONDON (Reuters) - Physical gold demand slumped by nearly a third in the three months to September, GFMS analysts at Thomson Reuters said on Thursday, as a rally in prices curbed jewelry buying in the key Chinese and Indian markets.

Gold jewellery is displayed at a shop in New Delhi, India, March 1, 2016. REUTERS/Anindito Mukherjee

The net surplus in the gold market was at its highest since 2005, it said, as demand for gold-backed exchange-traded funds also weakened.

Prices are expected to stabilize into the year-end, GFMS said, bottoming out at $1,240 an ounce. Next year it forecasts gold prices will average $1,420.

The U.S. election battle between Democrat Hillary Clinton and Republican Donald Trump, who go to the polls in November, has now overtaken Britain’s vote to leave the European Union as the key driver of gold buying, and consequently prices, it said.

“On balance, if Trump became President it would be likely to cause gold to rise above $1,400 and even $1,500 for the first time since April 2013,” it said.

“However, a combination of scrap supply and weak demand might well cause such a rally to face strong headwinds.”

“Meanwhile, if Clinton wins then it is probable that some of the risk premium in the gold price at present would be lost in a kneejerk response, potentially causing a downward shift of around $50.”

Consumption of physical gold in the form of coins, bars and jewelry was down nearly 30 percent year on year in the third quarter, while higher prices lifted scrap flows by a fifth.

Chinese jewelry buying fell 29 percent from a year before, more than offsetting an 11 percent rise in investment demand in the same period.

Indian consumption saw a still steeper drop, sliding 41 percent to 108 tonnes, while investment demand also fell 60 percent to 22 tonnes. Scrap sales more than doubled, meanwhile, to their highest since 1999.

GFMS said it expects both Chinese and Indian demand to pick up in the final quarter.

“Indian fabrication demand in the fourth quarter has started improving with fabricators indicating they are doing volumes in the range of 70 to 90 percent of their seasonal averages,” it said. “Lower prices will continue to be an important factor driving sales during the October-November festive season.”

Chinese buying will also benefit from festive demand, it added.

“Besides the seasonal demand impact as retail inventory levels rise ahead of the Chinese New Year next January, a rebound in retail consumer sentiment after a prolonged period of thrifting is also likely to boost jewelry demand, which in turn will stimulate gold imports in the remainder of 2016.”

Reporting by Jan Harvey, editing by David Evans