Worst Performer

Gold tumbled 19 percent to $1,361.93 in London this year, poised to end a 12-year winning streak during which prices rose as much as sevenfold. It is the third-worst performer, after silver and corn, in the Standard & Poor's GSCI gauge of 24 commodities, which fell 0.4 percent. The MSCI All-Country World Index of equities climbed 8.6 percent and the Bloomberg U.S. Treasury Bond Index lost 3.5 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 and jewelry demand strengthened. Indian and Chinese consumer demand may be 900 to 1,000 tons each this year, the gold council said. That would beat China's 2011 record of 778.6 tons and be near India's all-time high of 1,006.5 tons in 2010.

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

Investors sold 22.2 tons from gold-backed ETPs since the start of August, set for the smallest outflow since January, according to data compiled by Bloomberg. That took this year's drop to 682.7 tons, close to the 700 tons that Barclays Plc expects to be sold in 2013. The bank predicts no change in ETP holdings in 2014.

Hedge funds and other large speculators reduced bearish bets by 17 percent last week, U.S. Commodity Futures Trading Commission data show. The 14 most widely held options confer the right to buy gold 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 and UniCredit SpA see prices at $1,600, while Bank of America anticipates $1,652.

Demand for jewelry, coins, and ingots contrasts with record sales from ETPs, which at the peak in December held 2,632.5 tons, more than the official reserves held by all but three central banks. 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 by Bloomberg show.

Danske Bank A/S, the most accurate gold forecaster tracked by Bloomberg over the past two years, raised its estimate for next year's average to $1,138 from $938 on Aug. 20. Its fourth-quarter 2014 prediction of $1,100 is still 19 percent lower than prices today. 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 whom correctly predicted the rout that began in the second quarter, are also bearish. The French bank expects a 2014 average of $1,150 and New York-based Goldman says prices will retreat to $1,175 in 12 months.

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 2008 to June 2011 as the central bank pumped more than $2 trillion into the 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 of economists expect policy makers to reduce the $85 billion of monthly asset purchases starting in September.

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

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

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

“What frightens me is this is not going to be sustained,” said Dominic Schnider, the Singapore-based head of commodities research at the wealth-management unit of UBS, which anticipates a 2014 average of $1,325. “It's one thing that demand expanded over a short period of time. Maintaining it is another thing. To what degree we have seen demand being brought forward and then weigh on the 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, marketing manager Shi Lei said in an interview at the four-level Beijing store. The Shanghai Gold Exchange delivered 1,098 tons to buyers in the first six months, from 1,139 tons for all of last year, bourse data show.

Mining Companies

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

The slump forced mining companies to announce at least $26 billion of writedowns in the past two months, adding further constraints to supply. Toronto-based Barrick Gold Corp., the biggest producer, said Aug. 1 it may sell, close, or curb output at 12 mines from Peru to Papua New Guinea. Production isn't sustainable at prices below $1,250, Gold Fields Ltd. Chief Executive 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 premium to December this month for the first time since they started trading. The backwardation in commodities indicates worries about near-term supply.

Central-bank demand also is helping to compensate for the sales from ETPs. Nations added 534.6 tons to reserves last year, the most since 1964, and may buy another 350 tons this year, the gold council estimates. Official reserves total 31,910 tons, 16 times more than metal held in ETPs.

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

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