Gold wanes but retains hedge appeal Gold prices are heading towards their smallest annual percentage increase in five years as demand growth in China and India, the world's top buyers, slows. With one trading day left to the end of the year, spot gold prices have recorded an annual price gain of 5.3 per cent, the smallest since a 3.1 per cent rise set in 2008. The annual percentage gains are far smaller than the 11-30 per cent per year set during the period between 2009 and 2011. Gold has suffered in spite of renewed fears about the US economy and the dollar, which in the past have acted as catalysts for strong price gains. The political gridlock in Washington and the prospect of further quantitative easing by the US Federal Reserve has fuelled demand for precious metals among small investors recently. But the threat of going over the US fiscal cliff of automatic tax increases and spending cuts has so far failed to boost demand from gold among the largest institutional investors. On Friday, spot gold in London rose to $1,961.80 a troy ounce, up 0.3 per cent on the week. But the yellow metal is down 6.1 per cent over the past quarter. Gold demand in India, the world's second-biggest consumer after China, remains lacklustre in spite of some restocking ahead of the festival season in early 2013. The weakness of the Indian rupee against the US dollar, the currency in which gold is priced, is deterring buyers. Chinese gold consumption growth has also slowed in the second half of the year from the torrid pace of the previous two years. Even so, most analysts are anticipating another year of strong gold prices in 2013, on emerging signs of stronger physical buying around the world. "The entire precious metals complex has endured further downside pressure but gold physical demand has responded to the lower price environment," Gayle Berry, metals analyst at Barclays Capital, said in a note this month. Analysts and traders also believe that demand to buy gold as a hedge against currency devaluation remains strong among investors and asset managers as well as reserve managers at many central banks, providing support into 2013. Moreover, the annual rebalancing of the weightings of different commodities held by index investors was this year likely to result in gold purchases, they said. Gold has posted annual price gains every year since 2001, when the price of the commodity started a phenomenal boom that lifted prices from $250 an ounce a decade ago to a nominal all-time high of $1,920.30 an ounce in late 2011. In real terms, adjusted for inflation, gold prices are still a long way from their high of about $2,500 an ounce set in 1980 after the Soviet invasion of Afghanistan.