Gold prices could drop to five-year lows this year, extending two years of decline before they rebound in 2016 on a demand recovery in Asia, GFMS analysts at Thomson Reuters said in a report on Thursday.

In its Gold Survey 2015, GFMS said that while the prospect of rising prices is remote this year due to the relative health of the U.S. economy compared to Europe and emerging markets, gold's two-year slide is on track to bottom out.

"In our base-case forecast, gold is set to average $1,170 an ounce in 2015," it said.

"For 2016 we expect modest strength, with a base case of $1,250 an ounce as buying in Asian markets picks up and institutional investment demand in these markets also serves to offset the recent decline in over-the-counter gold demand from the West."

Gold could fall as low as $1,100 an ounce this year, it said, a level not seen since March 2010. Prices are expected to be capped at $1,340 an ounce.

Prices fell nearly 2 per cent in 2014 as physical demand hit a four-year low of 4,158 tonnes, down 18 per cent.

The previous year had seen heavy buying of physical gold, particularly in China, as spot prices crashed by 28 per cent, ending a 12-year bull run.

Gold jewellery buying, the biggest segment of demand, fell 9 per cent last year. Chinese jewellery consumption, which surged during the previous year's price crash, fell by a third.

That was partly offset by a recovery in Indian gold jewellery demand, which rose 14 per cent to a record 690 tonnes after three years of decline.

The retail coin and bar market slumped 40 per cent year-on-year, with Chinese and Indian demand particularly falling. Bar demand in China slid 53 per cent to the lowest since 2010.

"Looking at the supply-demand balance as a whole, the reduction in purchases in coins, bars and investment-grade jewellery helped push the market into a 204-tonne physical surplus for the year," GFMS said.

More positively, central bank gold purchases were at 466 tonnes, up 14 per cent year-on-year. Russian central bank acquisitions reached a record 173 tonnes.

Mine output rose to a record high for a fifth successive year, at 3,133 tonnes, the report showed. Hedging, or miners selling production forward, was the highest since 1999 at 103 tonnes.

Scrap supply fell nearly 13 per cent to 1,125 tonnes, as lower prices failed to tempt consumers to sell.

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