Physical gold demand fell 20 percent last year to its lowest since 2009, GFMS analysts at Thomson Reuters said in a report on Thursday, as a rebound in prices after three straight years of losses blunted appetite for the metal.
Buying of jewellery, coins and bars, plus official sector and industrial demand, fell to 3,349 tonnes last year from 4,184 tonnes in 2015, the analysts said, the lowest in seven years.
That helped lift the net surplus in the gold market to 1,176 tonnes, up from just 220 tonnes in 2015 and the biggest physical surplus this century.
Demand was hurt towards the year-end by gains in the dollar and a sharp drop in Indian demand after Prime Minister Narendra Modi's withdrawal of some denominations of bank notes sparked a cash crunch in the fourth quarter.
"The U.S. dollar is likely to remain a substantial headwind to further price rises, at least in the first half of 2017," it said. "Furthermore, there are few indications that physical demand from Asia is set to pick up just yet."
Political tensions linked to the new Trump presidency in the United States, the progress of Britain's departure from the European Union, and a host of elections in Europe may spark renewed gold demand later in the year.
That led GFMS to forecast gold prices averaging at USD1,259 an ounce in 2017.
The gold market saw its largest surplus since 2005 in the final quarter of last year, as demand from major consumer India wilted and investors sold out of gold-backed exchange-traded funds.
Indian gold demand slid to its lowest since 2003 last year at 580 tonnes, down by one third year-on-year. Jewellery demand in China, the world's biggest consumer of the precious metal, fell 15 percent in the last quarter to 146.6 tonnes.
Global jewellery fabrication, the largest single demand segment for the metal, fell by more than one fifth last year, while central bank buying slipped 42 percent to 252 tonnes.
Retail investment fell 12 percent to 986 tonnes in the full year, but rose 6 percent in the final quarter. North American retail investment rose by nearly one third in the last three months of the year, with U.S. buying rising 27 percent.
"We estimate retail demand will pick up in the beginning of 2017, mainly driven by a revival of physical bar demand," the GFMS report said. "With the inauguration of Mr Trump as president, more uncertainties may emerge on the horizon."
Mine supply fell 1.5 percent, but this was offset by a 10 percent rise in recycling and an increase in net hedging supply to 78 tonnes from just 21 tonnes in 2015.
(Reporting by Jan Harvey, editing by David Evans)
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