Inflation Fears "Will Strengthen" Demand to Buy Gold in 2013

FEAR of inflation will continue to make gold attractive and boost global demand and prices in 2013, according to the latest quarterly outlook from the Economist Intelligence Unit.

Demand to buy gold is set to rise a further 3% by weight, says the independent research unit of The Economist magazine, thanks to central banks worldwide keeping interest rates low, while emerging-market governments add to their gold holdings.

Prices are set to fall in 2014 however, it warns, as economic growth makes opting to buy gold for its "safe haven" properties less urgent.

"With loose monetary policy anticipated to continue in most markets during 2013, gold's attractiveness as a perceived inflation hedge is set to persist," says the EIU.

"Loose monetary policy will support the gold price," the report goes on, with "overall demand growth...likely to remain fairly stable" in 2014 as investors start to anticipate the interest-rate rises officially delayed by the US Federal Reserve until mid-2015.

But "if the economic recovery were to occur earlier than anticipated, then global
central banks would be likely to raise interest rates sooner than expected as well," the report warns.

"If [the US Fed] moved earlier on interest rates, investors could decide that gold was no longer as important as a safe-haven investment and sell their assets. This move towards profit-taking could trigger a collapse in prices beyond the mild declines we are forecasting for 2014."

In creating its forecast, the EIU expects emerging-market central banks to continue buying gold, making the official sector a net buyer worldwide throughout the next 2 years. But even though mining-output is constrained, scrap supplies from households and other owners will pick up as prices ease in 2014, with existing gold holders anticipating faster price falls ahead.