The outlook was expected to remain unfavourable for gold prices even in 1999 as world GDP growth and inflation were likely to remain at very low levels. Apart from a weak recovery in East Asia, lower demand from countries which were booming last year, would affect demand in 1999, the survey predicted.

August and September 1998, expected to favour a strong comeback for gold, saw demand being affected by the financial turmoil. "A full-blown emerging market crisis, a record one-day fall in Dow Jones and the sudden decline in the dollar that resulted, and the collapse of a large hedge fund placed the global financial system undertremendous pressure," the survey said.

The price rallied in September-October and reached a peak of $301. But the rally was shortlived and narrowly-based confined to speculators covering short positions.

The market had to cope with the collapse of demand across East Asia as well as absorb a record amount of scrap flowing out following the great exposure gold had developed to the region in the 90s. This was an indication that gold performed the role of a financial hedge in this region, the survey said. In normal times, East Asian demand would have provided a floor to the price at a level above $300 per ounce. Fabrication fell by 5 per cent year-on-year due to collapse in East Asian demand for jewellery.

On the other hand, India saw a strong increase in demand, to over 800 tonnes. European demand also went up by over 4 per cent to 881 tonnes.

However, managing director of Gold Fields Mineral Services (which publishes the survey), Philip Klapwijk, warned India was unlikely to post a similar gain in 1999.On the outlook for the current year, he said China also constituted a threat from the broader macro-economic perspective of a potential yuan evaluation.

On the supply side, the survey said, lower scrap flows in 1999 would be offset to a certain extent by increased producer hedging. "Some of the major producing countries are still relatively underhedged on average, and mining costs have plummeted, making selling into any rally all the more likely," the survey said.

The outlook for gold could improve in 1999 given the possibility of net central bank sales declining, especially considering the new situation in Europe after the introduction of the Euro. A collapse in the world stock markets followed by a substantial devaluation of the dollar would be beneficial to gold prices, the survey said. It pegged the price of gold at $265-$305 for the rest of the year.