For jewellers, gold loses its shine

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Demand for gold jewellery in the Middle East fell seven percent in the fourth quarter of last year, but was largely offset by a surge in investment.

"While current market conditions have impacted consumer spending on jewellery, purchasers in many of the key gold markets understand gold's intrinsic investment value and continue to buy."

Looking ahead, he believes the precious metal will continue to play a vital role for both retail investors and institutional players.

Caroline Bain, who heads up the Economist Intelligence Unit's commodity coverage, agrees. "With all other assets having already collapsed, investors are looking for somewhere to restore value," she says. "Historically gold has moved in line with the US dollar, but at a time of relative dollar strength gold is still going higher, so that relationship clearly does not apply anymore."

Bain sees gold trading at just under $900 per ounce this year amid continued economic uncertainty.

"In the first half of this year we're going to have a raft of bad news coming out of almost every region of the world," she warns. "Equity and bond markets are going to be very volatile and weak."

Gold prices may begin to slide towards the end of the year, when all the negative data has been priced into markets, prompting them to stabilise, but not recover, she adds.

Dan Smith, a metals analyst at Standard Chartered bank, expects gold to pull back slightly to $930 per ounce in the first half of the year, only to bounce back and break through the $1,000 barrier once again later in the year. Gold will average $1,025 per ounce in the second half as the dollar weakens and the "safe haven" flows continue, he argues.

"The main risks are the fact that a lot of the usual factors are not supportive at the moment," he says. "The dollar has been strong, inflation has largely faded away and the physical [demand] is quite weak."

A case in point is India, the world's largest consumer of gold, where imports have collapsed. Gold imports amounted to just 1.9 tonnes in January, compared with 18 tonnes in the corresponding period last year. The country last year imported around than 720 tonnes of gold to meet demand for jewellery and ornaments.

Still, Smith of Standard Chartered thinks physical demand will pick up later this year as people get used to higher prices.

At Dhanak Jewellers in Dubai's gold souk, Deven Jatakia takes comfort in tales he hears from other parts of the world.

"I think we are doing better here," he says. "Sales haven't stopped completely. People are still buying."

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