As demand from the world’s two largest consumers softens, price volatilities will persist in the commodities markets and investors will remain wary. The outflows seen last year may thus extend into 2012.

David Donora, head of commodities at Threadneedle Investments says: “On the macro side things are a little more mixed for commodities. Fundamentals are supported but macro is more mixed.”

“The two things are key here - the slowing down of emerging markets and I think they will continue to slowdown for the whole first-half of 2012 and this is not hugely supportive for commodity prices. But what is supportive is that while we’re watching emerging markets slow down, we actually seeing the US economy, the North American economy steaming up significantly, so there’s a balance there.”

Aggregate commodity flows in 2011 amounted to about $11.4bn in net outflows, led by sharp sell-offs in the second and third quarters because of “risk-off” cycles and macro uncertainties, namely the worsening debt crisis in Europe and grim forecasts for global growth that emerged from August, a Citi report says. Financial outflows were concentrated in the larger index market, with listed exchange-traded funds showing $500m in net purchases while investors redeemed $11.95bn in index trades.

Gold remained resilient as a safe-haven and also found support from demand in China and India. The U.S. dollar price rose by 8.9% to end the year at $1,531 per ounce based on the London PM fix, marking the eleventh consecutive year of increases, data from the World Gold Council showed.

The precious metal has continued its upward trajectory in January, breaking through $1,600 per ounce, and this trend looks set to continue going forward, says Owen Hegarty, vice chairman of Hong Kong-listed, Asia-focused gold miner G-Resources, which is preparing to begin production at a gold and silver mine in Indonesia. “We’ve already seen an increase so far this year of more than $100 per ounce. There’s no doubt in my mind we will see gold test $2,000 per ounce again in the coming months - and it could finish the year even stronger. Most analysts worldwide are tipping a strong year for gold and for gold equities.”

Continued gold purchases by central banks in emerging markets such as Thailand, India, Mexico and Russia will also lend support to demand, Albert Cheng, the Council’s managing director for the Far East says. The central banks are seeking to diversify their assets and preserve national wealth. “Gold is a tool that central banks can use to diversify their assets.”

Central banks’ purchases of gold totalled 439.7 tons in 2011, the Council says. The banks have continued to add gold on increasing concern about the creditworthiness and low yields of their existing reserve assets. Cheng adds: “There’s little choice as the reserves are mostly in US dollars, and central banks, especially those in developing countries, will keep up with their purchases of gold in the future.

Record gold imports from Hong Kong in recent months reflect China’s thirst for the metal and have added to speculation the People’s Bank of China has been building reserves. Interest is also strong among retail investors, helped by a lack other viable investment options. “A very big driver of increased world demand over the past few years has been increased Chinese buying - for domestic jewellery consumption and as a form of domestic saving,” Hegarty says.

The Council also foresees China overtaking India this year to become the world’s biggest gold consumer as rising incomes boost demand. Both China and India account for more than 40% of global demand. Annual global demand rose 0.4% to 4,067.1 tons in 2011, worth an estimated $205.5bn.

A weakening rupee and worries about inflation are dampening consumer demand for the precious metal in India, Cheng says. India’s jewellery and investment demand for gold fell 7% in 2011 to 933.4 tons, according to the Council.

China’s jewellery demand for gold may rise as much as 15% in 2012, and investment demand may increase 25%, Cheng says. In 2011, Chinese jewellery and investment demand reached 796.8 tons, an increase of 20%.

China is furthermore preparing to open the Pan Asia Gold Exchange in Kunming in June. This platform will allow individuals to buy physical gold online directly or through brokerage accounts, giving a significant boost to the yuan-denominated gold trade and the sophistication of the local market.

For key industrial commodities like copper and iron ore, weakening global demand is likely to put pressure on prices going forward. Despite the confident outlook among miners, China’s steel and construction sectors continue to suffer under Beijing’s tight credit restrictions and real estate controls. The use of copper as collateral for loans under Beijing’s tight monetary policy has also emerged as a trend in China this year, further inflating trade volumes while physical demand remains weak. Swollen inventories and waning consumption saw prices take a hit towards the end of the year and pushed the futures market into backwardation.

“We’re underweight in base metals,” Threadneedle’s Donora says. “We think the challenging environment in Europe will keep demand subdue and the slowdown in emerging markets will also temper demand for base metals.”