Demand for gold set to stay strong amid global risks

In its report released recently, it said that despite the brighter global economic outlook, there are abundant risks. Given this situation, it expects gold to continue serving as a capital preserver during times of market stress as it tends to perform well when other assets are languishing, or when investors are anxious.

“Its role in this regard will transcend the economic fortune of any one country or region. In the long term, demand for gold is determined by a globally diverse set of drivers not least of which is economic expansion, as evidenced by the massive demand for gold in emerging-market economies,” it said.

With a focus on high quality, liquid assets as desirable alternatives, gold is a natural destination for a proportion of these increased reserves. Some research papers have addressed the issue of gold's characteristics and benefits as a reserve asset, as well as optimal allocations for gold within a standard reserve asset portfolio. UBS in October forecast the gold price at US$1,900 this year.

Gold prices have been dropping recently due to better economic news from the U.S. and China. Set for a rebound, the 17-nation eurozone posted a 2012 trade surplus of 81.8 billion euros, more than reversing a deficit of 15.7 billion euros in 2011.

At US$1,628 on Friday, gold has fallen by US$81.20 or 4.7 percent in the past 12 months. Last week, billionaire investor George Soros cut his stake in exchange-traded products backed by gold last quarter as futures dropped the most in more than eight years. Soros Fund Management reduced its investment in the SPDR Gold Trust, the biggest fund backed by the metal, 55 percent to 600,000 shares as of Dec. 31 from three months earlier, a U.S. Securities and Exchange Commission filing showed.

Yet, last year, despite a 6.7-percent decline in the last quarter from US$1,776 an ounce to US$1,657, global gold prices in 2012 showed an 8.3-percent increase in the year against 2011. This is the 12th straight annual gain for gold. This was a result of all-time-high global gold demand in 2012 at US$236.4 billion, partly thanks to demand by central banks across the world.

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