LONDON, June 4 (Reuters) - Physical investment is set to replace jewellery as the largest component of gold demand for the first time this year due to double-digit losses in jewellery amid high prices, consultancy Metals Focus said in its annual report on Thursday.

Gold built powerful momentum from last year's strongest price performance in 44 years, turning its rise into a self-fulfilling prophecy, according to Metals Focus. It hit an all-time high of $5,595 per troy ounce in January when retail investors rushed to gain exposure to it.

Bullion's 20% price fall since then disappointed many individual investors, while some key bar and coin markets have been hit by high oil prices amid the Iran war, eating into disposable incomes.

Metals Focus expects gold to resume its bull run in the second half of 2026 and sees the average gold price surging 43% to a new record high of $4,920 per ounce in 2026, assuming that the economic and political costs of a prolonged conflict drive a swift resolution.

It sees total gold demand falling 2% in 2026 due to double-digit losses in jewellery and central bank purchases, partly offset by stronger physical investment.

Net official sector purchases will fall in 2026 despite continuing diversification of foreign currency reserves, as higher energy prices have led many central banks to step up efforts to curb currency depreciation through intervention in foreign exchange markets.

"This typically requires the sale of liquid reserve assets, including gold. An anticipated rise in Russian gold sales will also contribute to higher gross sales this year," Metals Focus said.

A 19% fall in jewellery demand last year coincided with widespread bullish price expectations and heightened geopolitical or economic uncertainty. Some consumers shifted to bar and coin purchases in 2025.

This trend will continue this year, with physical investment expected to rise 15% to the highest level since 2013, overtaking jewellery demand for the first time in Metals Focus' data. China will lead the growth.

The following are Metals Focus' gold supply and demand numbers, in metric tons:

2024 2025 2026F Change Change

25/24 26/25

SUPPLY:

Mine production 3,741 3,817 3,907 2% 2%

Recycling 1,365 1,404 1,476 3% 5%

Net hedging supply 0 0 0

TOTAL SUPPLY 5,106 5,221 5,383 2% 3%

DEMAND:

Jewellery fabrication 2,025 1,646 1,459 -19% -11%

Industrial demand 326 323 326 -1% 1%

Net physical investment 1,211 1,404 1,615 16% 15%

Net hedging demand 56 54 58 -4% 7%

Net official sector 1,089 848 720 -22% -15%

buying

TOTAL DEMAND 4,708 4,275 4,177 -9% -2%

Market balance 397 946 1,206 138% 27%

Net investment in ETPs -3 802 250 -69%

Market balance less 400 144 956 -64% 561%

ETPs

Gold price ($/oz, 2,386 3,432 4,920 44% 43%

London)

Source: Metals Focus

(Reporting by Polina Devitt;Editing by Rod Nickel)