The rout in gold that wiped out $56 billion of value this yearis spurring consumer demand in China and India, the biggest buyers,and leading JPMorgan Chase & Co. and Bank of America Corp. tosay prices are bottoming.

Sales of jewelry, coins, and bars will reach as much as 1,000metric tons in India and China in 2013, valued at a combined $87.6billion, the World Gold Council estimates. Prices will average$1,300 an ounce in the fourth quarter, or 5 percent less than now,the median of 17 analyst estimates compiled by Bloomberg shows.Bank of America is the most bullish, predicting a fourth-quarteraverage of $1,495, and JPMorgan anticipates rising averages inevery quarter through the end of next year.

While investors from John Paulson to George Soros sold after thebear market began in April, as some investors lost their faith ingold as a store of value, the slump boosted sales in Asia.Australia & New Zealand Banking Group Ltd., Deutsche Bank AG,and UBS AG opened vaults in the region this year, and U.K. bullionexports rose eightfold, a sign to Macquarie Group Ltd. of the flowof metal from west to east. Asian buyers are being attracted byprices that are now 29 percent below the record $1,921.15 reachedin September 2011.

“Whenever we have a bit of idle cash, we think of buying a fewpieces,” said Wang Xiang, a 70-year-old from the eastern Chineseprovince of Anhui, as he bought a gold pendant for his grandson inBeijing's Caibai Jewelry store, the nation's largest by sales. “Wedon't know how to invest otherwise, and that's the traditional wayof preserving wealth.”

Worst Performer

Gold tumbled 19 percent to $1,361.93 in London this year, poisedto end a 12-year winning streak during which prices rose as much assevenfold. It is the third-worst performer, after silver and corn,in the Standard & Poor's GSCI gauge of 24 commodities, whichfell 0.4 percent. The MSCI All-Country World Index of equitiesclimbed 8.6 percent and the Bloomberg U.S. Treasury Bond Index lost3.5 percent.

The metal rallied 15 percent since reaching a 34-month low of$1,180.50 in June as sales from exchange-traded products slowed andjewelry demand strengthened. Indian and Chinese consumer demand maybe 900 to 1,000 tons each this year, the gold council said. Thatwould beat China's 2011 record of 778.6 tons and be near India'sall-time high of 1,006.5 tons in 2010.

Premiums paid by jewelers for physical supply rose to a recordin India and jumped fourfold in China as the flow of metal to theregion failed to keep pace. Purchases advanced 45 percent to 571.2tons in the first half in China and 48 percent to 567.5 tons inIndia, the London-based gold council estimates. Global demandexpanded 32 percent to 2,040.2 tons.

Investors sold 22.2 tons from gold-backed ETPs since the startof August, set for the smallest outflow since January, according todata compiled by Bloomberg. That took this year's drop to 682.7tons, close to the 700 tons that Barclays Plc expects to be sold in2013. The bank predicts no change in ETP holdings in 2014.

Hedge funds and other large speculators reduced bearish bets by17 percent last week, U.S. Commodity Futures Trading Commissiondata show. The 14 most widely held options confer the right to buygold at prices higher than today.

Gold will average $1,350 in the fourth quarter next year,according to the median in the Bloomberg survey. Commerzbank AG andUniCredit SpA see prices at $1,600, while Bank of Americaanticipates $1,652.

Demand for jewelry, coins, and ingots contrasts with recordsales from ETPs, which at the peak in December held 2,632.5 tons,more than the official reserves held by all but three centralbanks. The funds now own 1,949.2 tons valued at $85.4 billion,$56.3 billion less than at the end of December, data compiled byBloomberg show.

Danske Bank A/S, the most accurate gold forecaster tracked byBloomberg over the past two years, raised its estimate for nextyear's average to $1,138 from $938 on Aug. 20. Its fourth-quarter2014 prediction of $1,100 is still 19 percent lower than pricestoday. Credit Suisse Group AG, Citigroup Inc., ABN Amro Group NV,and Macquarie also anticipate declines.

Societe Generale SA and Goldman Sachs Group Inc., both of whomcorrectly predicted the rout that began in the second quarter, arealso bearish. The French bank expects a 2014 average of $1,150 andNew York-based Goldman says prices will retreat to $1,175 in 12months.

Gold slumped this year in part because of investors'expectations the Federal Reserve will taper stimulus as the U.S.economy strengthens. The metal rose 70 percent from December 2008to June 2011 as the central bank pumped more than $2 trillion intothe financial system by purchasing debt, increasing investors'concern about currency debasement and accelerating inflation.

Biggest Investor

A Bloomberg survey this month showed that 65 percent ofeconomists expect policy makers to reduce the $85 billion ofmonthly asset purchases starting in September.

Paulson, the biggest investor in the largest ETP, cut his stakeby 53 percent to 10.2 million shares now valued at $1.36 billion inthe second quarter, according to a filing to the U.S. Securitiesand Exchange Commission (SEC). The 57-year-old hedge fund manager,who told investors as recently as last month that they should owngold, cut the holding “due to a reduced need for hedging,” NewYork-based Paulson & Co. said in an e-mail.

Billionaire Soros and Daniel Loeb sold their entire investmentsin the SPDR Gold Trust, the biggest ETP in the metal, last quarter,SEC filings showed. Soros Fund Management LLC's shares were valuedat $63.2 million as of June 28, and Loeb's Third Point LLC holdingswere valued at $15.5 million at the end of the period, according todata compiled by Bloomberg.

Growth in demand may be constrained in the second half by a lackof supply, with the cost of borrowing gold for six months close toa four-year high. The London Bullion Market Association says thatmay indicate a scarcity of metal. The Indian government has soughtto curb bullion imports to combat a record current-account deficitand weakening rupee.

“What frightens me is this is not going to be sustained,” saidDominic Schnider, the Singapore-based head of commodities researchat the wealth-management unit of UBS, which anticipates a 2014average of $1,325. “It's one thing that demand expanded over ashort period of time. Maintaining it is another thing. To whatdegree we have seen demand being brought forward and then weigh onthe second half is unclear.”

First-half sales at Caibai Jewelry exceeded 10 billion yuan($1.6 billion), from 12.5 billion yuan in all of 2012, marketingmanager Shi Lei said in an interview at the four-level Beijingstore. The Shanghai Gold Exchange delivered 1,098 tons to buyers inthe first six months, from 1,139 tons for all of last year, boursedata show.

Mining Companies

While three increases in India's bullion import taxes may reduceofficial volumes, actual sales may be boosted by a surge insmuggling. Customs agents at Mumbai airport confiscated gold valuedat 93 million rupees ($1.4 million) from April to June, almost asmuch they seized for all of 2012, according to data from thecustoms department's Air Intelligence Unit.

The slump forced mining companies to announce at least $26billion of writedowns in the past two months, adding furtherconstraints to supply. Toronto-based Barrick Gold Corp., thebiggest producer, said Aug. 1 it may sell, close, or curb output at12 mines from Peru to Papua New Guinea. Production isn'tsustainable at prices below $1,250, Gold Fields Ltd. ChiefExecutive Officer Nick Holland said in an interview in June.

Mounting concern about availability is reflected in futures,with the August contract on Comex in New York flipping to a premiumto December this month for the first time since they startedtrading. The backwardation in commodities indicates worries aboutnear-term supply.

Central-bank demand also is helping to compensate for the salesfrom ETPs. Nations added 534.6 tons to reserves last year, the mostsince 1964, and may buy another 350 tons this year, the goldcouncil estimates. Official reserves total 31,910 tons, 16 timesmore than metal held in ETPs.

“The arguments for holding gold are in the balance,” said JeremyBaker, a senior commodities strategist who helps oversee about $700million of assets at Harcourt Investment Consulting AG in Zurich.“The physical market is definitely helping and providing a boostand will go a long way to stabilizing prices, but for a longer-termrally we need to see ETF declines turning around, and I don't seethat happening anytime soon.”

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