As per a report by the World Gold Council, investment demand for gold remained very strong in the second quarter of 2009, rising 46 percent on year earlier levels. The overall demand for gold fell back from recent high levels due to weak economic conditions and high gold prices affecting demand, according to the Q2’09 Gold Demand Trends report published today by World Gold Council (WGC). Although gold demand remains very high on a historical basis, total demand in Q2’09 was down 9 percent on the levels of a year earlier, a 6 percent decline in $US value terms to $US21.3b.

looking at the Indian markets, despite domestic economic pressures and sustained near record local gold prices, second quarter gold demand recovered from the exceptionally weak levels witnessed in the previous quarter, rising from 17.7 tonnes in Q1’09 to 109.0 tonnes in Q2’09. However, total demand remained well below year-earlier levels. Total gold off-take was down 38 percent on Q2’08, with jewellery, the largest component of demand, falling 31 percent. Retail investment demand returned to positive levels from the dishoarding during the first quarter, but was weaker in comparison to year-earlier totals. Demand for bars and coins, at 21.0 tonnes, was less than half the 48.1 tonnes recorded in Q2’08.

Aram Shishmanian, CEO of World Gold Council, mentioned that “Despite the recent near record rupee prices, investor appetite and consumer affinity for gold remains healthy. While the most recent quarter-on quarter improvement was in large part a seasonal improvement, we expect a healthy rebound in activity. A stronger economic outlook than many regions, and the forthcoming festival season suggest that demand for gold will continue to build on recent trends. We expect consumers, investors and the trade to look for opportunities to buy following an exceptional period of profit-taking and de-stocking.

He further added that “More widely, this is another excellent quarter for global gold demand as gold’s unique properties and broad demand and supply base continue to sustain a vibrant market and support the price. Although demand failed to match the exceptional levels seen in previous quarters when the economic and financial crisis was at its peak, demand nevertheless remained very robust throughout the quarter. Investment demand, in particular, witnessed a strong quarter and we believe this indicates a growing recognition of gold as an important and independent asset class. The global economic downturn has certainly had a major impact on the purchasing power of gold consumers, as have the high local prices and dollar volatility. However, we continue to see pockets of solid demand in many non-western markets on dips in the gold price. We expect consumers, particularly in India, to look for opportunities to buy back the jewellery that has been recycled over recent quarters.”

The figures, compiled independently for WGC by GFMS Limited, reveal that total global identifiable investment demand for gold, which includes exchange traded funds (ETFs) and bars and coins, remained very strong. Investment demand rose to 222 tonnes, rising 46 percent on year-earlier levels, but below the extreme highs experienced during the previous three quarters when the economic and financial crisis was at its peak.

Global retail investment, which includes demand for physical gold in the form of bars and coins, had another healthy quarter. Net retail investment was up 23 percent relative to the previous quarter and 12 percent on the levels of Q2’08 as investors, specifically those in western countries, continued to seek out gold for its unique wealth preservation qualities. Flows into gold ETFs returned to a more moderate, but historically robust level of 57 tonnes after an exceptional first quarter that saw net inflows total 465 tonnes. Inferred investment, which covers the less visible part of gold demand, stood at 195 tonnes in Q2, up from 10 tonnes for the same period last year. This rise reflected a significant increase in gold held by investors, wary of counterparty risk, in allocated gold accounts.

The impact of high local gold prices (near record highs for consumers in some countries), at a time of severe global economic difficulty, led to a 22 percent decline in consumer demand for gold jewellery, as compared to the same period in 2008. The exception was mainland China, which recorded 6 percent rise in tonnage relative to Q2 2008 due to the country’s historic low base of consumer demand, the relative stability in the local currency and gold price, and the resilience of the Chinese economy to the global economic downturn.

Global industrial demand continued to suffer from the effects of weak economic conditions, falling 21 percent relative to year-earlier levels. The sector experienced an 18 percent quarter-on-quarter gain, however, reflecting a significant improvement in the other industrial and decorative and electronics components. Gold demand in Greater China in Q2 was up 9 percent on the levels of Q2 2008, equivalent to a 12 percent rise in $US value terms. Net retail investment was up a very strong 35 percent on year-earlier levels, while jewellery demand posted a more modest 4 percent rise. In both cases, the gains were attributable to ongoing strength in demand in mainland China, partly offset by weakness in Taiwan and Hong Kong.

Total demand for gold in the Middle East region fell by 18% in Q2’09 to 72 tonnes (total demand was up 33 percent on the previous quarter). The investment component of demand fell 31% to 3.8 tonnes, while jewellery off-take was 17 percent below Q2 2008 levels at 68 tonnes (demand for jewellery was up 37 percent on the previous quarter, but this was to a significant extent a seasonal improvement).

In the US, total gold off-take in Q2’09 was 10% above the levels of Q2’08, equivalent to a rise of 13 percent in $US value terms, driven by retail investment demand which rose by 91 percent. Jewellery off-take in Q2 was down 19 percent in tonnage terms on the levels of Q2’08, and in $US value terms, the result was broadly similar at -17 percent. Notably, those rates of decline were significantly less severe than those seen in Q4 2008 or Q1 2009, suggesting that the declining trend in demand may be starting to stabilise.

Total supply of gold was up 14 percent relative to year-earlier levels at 927 tonnes, driven by lower levels of producer de-hedging, with mine output and recycling activity making a smaller contribution. Q2’09 supply was nevertheless 23 percent below the levels of the previous quarter. The main contributor was a 41 percent reduction in recycled gold, suggesting that profit-taking and distress selling has decreased. The central bank sector had a dampening impact on supply - net purchases of 14 tonnes were recorded in Q2’09 compared to net sales of 69 tonnes in Q2’08, the figures indicating the first net purchase by central banks for a considerable length of time.