Gold may drop below $1,200 an ounce in coming months

By Jan Harvey

LONDON (Reuters) - Gold prices are likely to slip below $1,200 an ounce in the months to come, GFMS analysts at Thomson Reuters said in a report on Thursday, with U.S. interest rates expected to rise and physical demand remaining soft.

The metal has rallied more than 16 percent this year, reaching a 13-month high of $1,282.51 an ounce this month, but may struggle to maintain those gains, the report said.

"Following three consecutive years of annual price declines, gold has recorded a blistering start to 2016," GFMS said in its Gold Survey 2015. "Such an impressive performance has been largely attributed to a reduction in risk appetite among investors and fresh interest in safe haven assets."

While reduced expectations for U.S. interest rate increases this year have also helped gold, the fact the Federal Reserve remains on a path to tighten monetary policy will cap gains for the metal, along with other factors, it said.

"We believe that the recent price rally will prove to be short-lived, and once current market turbulence starts to ease, we are likely to see the price retreat again, particularly as physical demand in key Asian markets is already weak."

Global physical gold demand fell to a five-year low of 4,124 tonnes in 2015, down 2 percent year-on-year, while global jewellery demand fell to a three-year low of 2,166 tonnes, down 3 percent, GFMS said.

China and India, which vie for the position of the largest global gold consumer, saw divergent trends last year. Chinese gold fabrication, including scrap, slipped to 668 tonnes, while Indian fabrication rose to 812 tonnes, up 5 percent.

Chinese jewellery consumption fell 11 percent to 563.7 tonnes, a four-year low. Jewellery fabrication in the country slid nearly 10 percent to 580 tonnes.

"The biggest drag on China's annual gold demand last year mostly took place during the first half, when the strong performance of the domestic equity market ... attracted much of the society's capital into the stock market," GFMS said.

India's jewellery consumption rose, however, to 674.5 tonnes, up nearly 2 percent, while fabrication climbed to 736 tonnes from 690 tonnes.

An improving market balance will underpin gold in the longer term, GFMS said. It expects gold mine output to post its first annual decline since 2008 this year after reaching a record 3,158 tonnes in 2015, and sees physical demand improving as the year progresses.

"The forecast reduction in global mine output and a gradual recovery in demand will see the physical surplus narrow in 2016, providing support to the gold price and laying the foundations for better prospects," it said.

(Reporting by Jan Harvey; Editing by Mark Potter)