Fabrication demand for gold in 2008—which consists mostly of jewelry as well as electronics, dental, medical, and other uses—declined to 77.4 million ounces from 82.9 million ounces in 2007, according to a report on the precious metal released Tuesday. This year total demand is projected to fall further, to 71.3 million ounces.

Consumer spending on discretionary items, such as gold jewelry, is expected to remain weak this year, according to the 2009 Gold Yearbook, an annual report produced by the CPM Group. Jewelry demand could fall to 56.5 million ounces in 2009 from 60.8 million ounces last year. Industrial demand, meanwhile, could decline to 14.8 million ounces from 16.6 million ounces.

Fabrication demand for gold has been in decline since 2001, partly reflecting the rise in prices, according to the report. This rise in prices is expected to continue into 2009.

“Gold, which has played a monetary role for centuries, appears to be enjoying a rehabilitation of its historical might and role as a financial asset, as investors look toward safe haven assets in these volatile times,” according to the report’s primary conclusion.

After having reached record levels above $1,000 in March 2008, gold prices appear likely to retest these levels in 2009, according to the report. Rising economic uncertainties related to recessionary conditions and rising joblessness, increasingly volatile and vulnerable financial markets, and weakening economic conditions helped continue to spur strong investment demand for gold this past year.

“Investors are concerned about the preservation of the value of their assets amid the massive destruction of wealth over the past year,” according to the report. Not since the Great Depression and World War Two has sentiment about the state of financial and economic conditions been so pessimistic.”

The report estimates that total gold supply rose to 114.8 million ounces last year, up 3.4 percent from 111.1 million ounces in 2007. Mine production continued to decline last year, to 55.3 million ounces from 58.7 million ounces in 2007. Secondary supply meanwhile surged to 38.5 million ounces in 2008 from 32.4 million ounces in 2007. This year total supply could rise further, to 118.6 million ounces. Mine production may rise to 57.2 million ounces, secondary supply to 40.5 million ounces, and transitional economy sales may hold steady at 21 million ounces.

Last year saw official sales, mostly from central banks, decline to 5.8 million ounces from 15.9 million ounces in 2007, according to the 203-page report. This reduced the total available supply to the gold market to 120.7 million ounces from 127 million ounces in 2007. This year the report estimates official transaction sales may be no more than 5 million ounces and total available supply may be 123.6 million ounces. Most central banks may have sold much of the gold that they have wanted to sell over the past two decades. They may sell much less going forward and are likely to sell less given current economic conditions.

Investors continued to buy large quantities of gold last year, totaling 43.3 million ounces—slightly lower than the 44 million ounces bought in 2007, according to the report. Amid the continued inclination to acquire safe haven assets around the world, investor buying is projected to reach a record 52.3 million ounces this year. Continued volatile and weak financial and economic conditions are expected to be supportive of strong investment demand this year as well. Combined with short term and speculative activity, gold prices are expected to surpass last year’s record intraday high of $1,033.90, seen on March 17, 2008.

JCK