The cheapest gold in four years is proving irresistible for shoppers in China and India, where rebounding demand may signal an end to the longest price slump in more than a decade.

Purchases in Asia will help support prices that are headed for the first two-year decline since 2000, Standard Chartered Plc said. While surging equities and tame inflation have eroded gold’s appeal as a hedge, sending bullion tumbling to $1,132.16 an ounce today, prices are nearing the lows forecast by banks from Citigroup Inc. to Goldman Sachs Group Inc.

China supplanted India as the world’s largest buyer last year, when the metal plunged 28 percent. Jewelry and bullion are viewed in both countries as a store of value and are popular as gifts. China’s gold imports from Hong Kong in September were the highest in five months. Indian jewelers are forecasting a surge in fourth-quarter sales.

“There is a floor around $1,100 set by Chinese retail demand,” Paul Horsnell, head of commodities research at Standard Chartered in London, said by e-mail on Nov. 5. “Physical demand indicators out of China and India are firming.”

The All India Gems & Jewellery Trade Federation has said fourth-quarter imports of the metal may jump 75 percent. Gold is often bought during the year-end festivals, and during the wedding season, it is part of many bridal trousseaus and as gifts in the form of jewelry.

And on the Dollar:

To other investors, the selloff in gold is far from over, with the rallying dollar curbing demand for the metal as a store of value. The greenback rose to a five-year high against a basket of 10 currencies.

Gold will end the year at $1,100 and keep sliding to $800 by the end of 2015, Georgette Boele, an analyst at ABN Amro Group NV in Amsterdam, wrote in a Nov. 5 report. The chances are increasing that it will slip to $1,000 as oil prices tumble and the U.S. economy improves, Societe Generale SA’s Michael Haigh, an analyst who correctly forecast gold’s 2013 rout, said Oct. 30.

“The reasons to hold gold are getting smaller and smaller,” Sameer Samana, a senior international strategist at Wells Fargo Advisors LLC in St. Louis, which oversees $1.4 trillion, said in a Nov. 5 telephone interview. “The dollar will continue to trade strong since there is a divergence between the U.S. economy and other major economies in Asia and Europe.”

Unprofitable mine output will cause producers to shelve plans and help limit gold supplies, according to Caroline Bain, a commodities economist at Capital Economics Ltd. in London. She said prices will probably rebound to $1,200.

David Fuller's view

Gold has been the plaything of Western investment banks for well over a year.  Acting in concert with often large short positions and both issuing and repeating considerably lower targets, they have done very well in their efforts to drive the price lower. 

It has often been a perfect storm.  With Wall Street and many other stock markets in overall bull trends for the last 5.5 years, and with the global bond market bubble gaining an extended life from QE, who needed gold (weekly & daily)?  After all, in a yield-hungry world it offers no return.  Moreover, the Dollar Index (weekly & one-year line) has surged higher since the beginning of July and could remain firm until the Federal Reserve decides to temper its strength to help US exporters. 

What many people have temporarily forgotten is that gold is hard money, although its value will inevitably fluctuate, just like anything else which can be bought or sold.  As such, gold has outperformed and outlasted many failing fiat currencies for several thousand years.  Paper money has no intrinsic value and can be printed into oblivion.  There is no real anchor for today’s fiat currencies and central banks always aim to print enough of it to produce at least 2 percent annual inflation, and sometimes considerably more. 

People from ancient civilizations know this better than most.  They are leading indicators, buying gold for value rather than as a momentum play.  The citizens of China and India are now buying more gold, as will citizens in other countries which have had a long history of currency debasement. 

The forecasts of lower prices for gold are increasingly bold.  This is a characteristic of markets as they overshoot on the downside, as I have often mentioned.  Similarly, upside forecasts increase in markets that are becoming significantly overextended.  This occurs not only for reasons of irrational exuberance but also subconscious psychological factors, and emboldens hopes for even further gains at a time when many sense that the endgame has commenced. 

For these reasons market trends often overshoot temporarily.  Gold could still overshoot to the downside before we see persistent evidence of a recovery.  Nevertheless, bullion’s cyclical bear market is now in its latter stages, as indicated by recently deteriorating sentiment and today’s strong upside key day reversal.  Long-term investors are beginning to buy gold on weakness.