[GLD/GOLD] Gold Expected To See Correction By The End Of The Year

Gold prices have rallied about 20 percent since the start of November, and are now hovering around US$1,130 an ounce.

But analysts said those levels are not expected to last because profit-taking may set in before year-end, as investors unwind their positions.

The longer term view for gold is bright, given expected strong demand from central banks and weakness in the US dollar.

The price of the yellow metal has fallen about 8 per cent from its record of US$1,226 an ounce last week.

There is, however, some buying support for the commodity, amid concerns about sovereign rating downgrades. Earlier this week, ratings agency Standard & Poor's lowered its outlook for Spain, while Fitch reduced its rating on Greece.

But analysts generally expect gold prices to trend down in coming days.

Wong Eng Soon, analyst, Phillip Futures said: "At the end of the year, portfolio managers, asset managers, want to take profits and when they are taking profits, they will be unwinding their positions.

"And gold, of course, is one of the major victims. I'm looking at a correction of up to US$1,050."

Analysts said the US$1,050 level is being seen as a support level, as this was the price at which the Indian central bank bought 200 tonnes of the precious metal last month from the International Monetary Fund.

The purchase was viewed as a sign of confidence in the strength of gold prices, with India being the world's top gold consumer.

China has also expressed interest in increasing its gold reserves to 6,000 tonnes in the next three to five years, and 10,000 tonnes in the next eight to ten years. In November, Sri Lanka also bought 10 tonnes of gold from the International Monetary Fund.

Going forward, there is a glittering outlook for gold, with prices expected to test new highs. Traders said the boost is expected to come from institutional investors adding gold to their portfolios, as well as central banks looking to stock up on the precious metal.

Albert Cheng, managing director (Far East), World Gold Council said: "Going forward, we have seen a structural shift of central banks, which in the past 10 years have been selling a little bit of their gold over the years to last quarter. (In) quarter three, we have seen a net seller become a net buyer."

Investor interest in gold exchange traded funds is also expected to support prices of the metal.

Some experts said investors should not be buying into gold for returns, but should take it as a hedge against inflation, or as part of a defensive strategy in a diversified portfolio.