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(Kitco News) - Private investor gold demand slid 5.8% in 2011 versus 2010, to 34.3 million ounces, as prices reached record highs and putting the metal out of reach for some buyers, said a commodities consulting firm Tuesday.

The underlying fundamentals that have supported gold in recent years such as sovereign debts, deficits and trade imbalances are likely to continue to keep the metal underpinned, but investors appear reluctant to chase ever-rising prices and that could be a factor in the gold market for 2012 and beyond, said CPM Group, a New York-based commodities consultancy, in its Gold Yearbook, released Tuesday.

“Investors (are) … showing signs of being increasingly willing to hold off on purchasing metal until prices soften from recent levels, a tendency that may continue in 2012 and beyond,” the firm said.

They said this investment approach was seen in gold exchange traded products during 2011. Investors sold some of their holdings into the price rally during the first seven months of the year and bought gold during the last part of the year when prices fell. Gold prices rose over $1,900 an ounce in September, but fell sharply afterward and have yet to retake that high-water mark.

“Such investor hesitance also was seen in gold coin buying patterns over the course of 2011, in Indian demand trends, and in other aspects of the gold investment market,” they said.

This change in gold buying could weigh on total investment demand and slow its rate of growth, they said. Gold will continue to find support from negative real interest rates globally and worries about fiat currencies, but those concerns will limit price breaks, rather than driving prices higher, they said.

Although private investor gold holdings fell in 2011, this comes on the back of two years of double-digit growth from already high levels of net additions to investor holdings, they said. For 2012, global net additions to investment demand are expected to decline slightly to 34.2 million ounces, down 0.5% from 2011 levels, which is still a high level, they said. Although it is expected to drop slightly, the strong interest in investment “suggests that investors are still interested in gold and will use any weakness in prices as a buying opportunity,” they said.

What this means is prices aren’t expected to fall sharply this year, but at the same time, prices shouldn’t rise above 2011’s record on a sustained basis.

Real interest rates are expected to remain at negative levels in 2012 as global growth is expected to slow, and these rates are expected to remain negative into 2013. “Interestingly, it should be noted that returns on gold historically showed a tendency to decline when real interest rates were lower than minus 2%,” they said.

Gold may have to compete with equities in 2012, CPM Group said, “in part because of the weakness in these markets during 2011 and in part because many of these companies are sitting on large amounts of cash.”

CPM Group said some gold investors are banking on rising inflation because of global fiscal stimulus, but in the near-term the firm said it does not see this as an issue and said future inflation may not occur. “Monetary authorities are aware of this danger and plan to sop up the excess liquidity that could result when these funds begin being mobilized,” they said. 

They also said the correlation between inflation and gold prices “is nearly non-existent. The correlation between gold prices and U.S. inflation studied on a monthly basis from 1970 to 2011 stood at 7%. This relation actually turned negative in the period between 1990 and 2011,” they said.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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