LONDON: Gold's decade-long price rally could take the metal above $1,600 an ounce by year-end, metals consultancy GFMS said in a widely anticipated industry report on Wednesday, as investors' appetite for gold sharpens further.
While the prospect of higher interest rates in developed economies, particularly the United States, could weigh on gold, these are unlikely to materialise in the near term, the company said.
Meanwhile, strong investment, particularly among key Asian consumers, a dearth of official sector sales, recovering jewellery demand and relatively muted levels of scrap returning to the market promise to keep the metal well supported.
"The type of things that would really spell the end for this rally are interest rates being tightened across the board and a clear change in monetary policy," GFMS Executive Chairman Philip Klapwijk told Reuters.
"It would change also if you saw the fiscal houses being seriously put in order, government bond crises being not just deferred but probably taken off the agenda, and it would change if you saw inflation expectations ease again."
"I think on all those fronts you are unlikely to see too much progress this year. And that means the investment case for gold is going to remain a pretty strong one," he said.
Gold hit a record $1,476.21 an ounce on Monday.
Identifiable investment demand -- which includes bars, coins, and investment in exchange-traded funds and similar products -- grew by 5.5 percent last year to 1,514 tonnes as rising coin and bar demand outweighed a drop in ETF inflows.
The pace of growth in identifiable investment slowed, however, rising 79 tonnes against 212 tonnes the previous year.
Demand for physical gold bars is expected to stay elevated this year after 2010's strong performance, when consumption rose to 880 tonnes from 531 tonnes, its highest in at least a decade.
Inflows into gold-backed exchange-traded funds (ETFs) tailed off last year, however, to around 338 tonnes last year from 617 tonnes in 2009. By end 2010, ETFs and similar products held 2,177 tonnes of bullion.
GFMS said the hefty drop in flows was chiefly a function of the extremely high levels of buying seen in 2009.
"Some of this apparent slack in ETFs... is believed to have been taken up by allocated gold accounts, which can incur costs of as little as 0.1 percent per year," its report said.
"ETFs typically charge around 0.4 percent per year in fees for investment management, as well as charging brokerage fees for every transaction made."
Gold jewellery demand is expected to roll back, meanwhile, after recovering last year to 2,017 tonnes from a low of 1,814 tonnes in 2009. That was still the second lowest gold jewellery sales figure of the last decade.
"We are expecting that there could be a slight retracement (in 2011)," said Klapwijk.
"There was a big rebound last year, but it was almost entirely led by India, and we are not as positive on Indian jewellery demand this year."
"That is partly because we felt there was some degree of accelerated buying in the market last year on expectations of higher prices, and it is unlikely that we will see a repetition of the same this year."
De-hedging by miners -- or buying back forward sales -- absorbed around 103 tonnes of gold from the market, down from 236 tonnes in 2009 and the lowest level since 2005.
On the supply side, mine production rose by 100 tonnes to 2,689 tonnes in 2010, a third year of increase and the highest annual production figure since at least 1998.
Russia edged ahead of South Africa as the world's fourth largest mined gold producer. Its output eased by nearly 2 tonnes to 203.4 tonnes, while South African production slid to 203.3 tonnes from 219.8 tonnes.
China, Australia and the United States remained the biggest producers of mined gold. Global average gold mine costs rose 17 percent to $557 an ounce, GFMS figures showed.
Official sector sales, however, evaporated. After selling 34 tonnes of gold in 2009, banks moved onto the other side of the market to buy 73 tonnes of bullion last year.
The main seller in the last 12 months has been the International Monetary Fund, which completed a planned sale which saw it dispose of 403.3 tonnes of gold.
"Central bank purchases may even increase a bit (this year) because we don't have the factor of the IMF sales to take into account," said Klapwijk. "On a net basis, purchases could actually go up a bit."
Scrap sales were muted, easing to 1,645 tonnes from 1,695 in 2009.