Gold prices rebounded somewhat through the rest of the week to close at $1,187.70, after falling to $1,175 an ounce Tuesday, a 7% drop from the June high.
Gold prices slid to a two-month low last week, but analysts and traders believe demand is robust enough to prevent an even sharper drop in prices in coming weeks.
Gold's appeal as a haven in time of trouble has boosted prices over the past three years, with gold reaching a record Comex futures close of $1,257.20 an ounce on June 18. The precious metal is up 25% in the past year and has been one of the best-performing assets through the financial crisis. In the first half of the year, gold benefited from worries about the euro amid a roiling fiscal crisis along the periphery of the single-currency zone.
A lot of the interest at the moment is from long-term investors, analysts said.
Other factors that could boost gold include demand from emerging economies—the latest Chinese trade data shows a continued healthy appetite for precious metals—and the increasing range of gold-based exchange-traded funds, notes and other products.
India's festival and wedding season soon to start, gold jewelry demand is expected to get a boost. According to the World Gold Council, jewelry consistently accounts for more than two-thirds of global gold demand, whereas investment demand is less than one-fifth.
In a report this week, Commerzbank said that, in addition to burgeoning jewelry demand, falling scrap supplies could offer additional support to gold prices. There was a 43% slide in the supply of gold scrap in the first quarter of 2010, down to 343 tons, the bank said.
Central bank gold purchases, especially from emerging markets, may also play a role in future gold prices. The World Gold Council in a recent study said a risk-averse central bank should hold as much as 8.5% of its reserves in gold. Commerzbank gold analyst Eugen Weinberg said China would have to buy 4,400 tons of gold to reach that level.
He added that central banks in Russia, at 5.5% of reserves, and India, 7.5% of reserves, could be buyers of gold
Commerzbank described gold's long-term outlook as "favorable" and said it expects prices to rise to $1,250 an ounce by the end of the year and $1,350 an ounce by the end of 2011
