Demand for gold soars on double-dip recession fear

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World demand for gold shot up by more than a third in the second quarter as recession-spooked investors continued to look to the yellow metal as a safe haven.

As demand rose by 36 per cent to 1,050 tonnes in volume, it shot up by 77 per cent year to a record quarterly high of $40.4bn (£26.1bn) in value terms, according to the latest report published by the World Gold Council (WGC) yesterday.

The biggest boost came from a 118 per cent rise in investment demand, within which exchange-traded funds (ETFs) in the developed world ballooned by 414 per cent to account for 291 tonnes out of the 534-tonne total. The 235-tonne rise in ETFs is the strongest quarterly rally since the height of the financial crisis.

Meanwhile, investment in physical gold such as bars and coins – known as the "retail" sector by the gold industry – rose by a more modest 29 per cent. The strongest retail growth was in China, where the market boomed by 121 per cent to 37.7 tonnes as investors responded to both rising gold prices and poor performances of the country's stock and property markets. But there was a growing appetite for physical gold in Europe, in response to concerns raised by the sovereign debt crisis and fears of a double-dip recession. The strongest growth is in Germany and Switzerland.

Sterling gold prices have risen consistently since 1999, rocketing up by nearly £150 to £621.59 per ounce from 2008 to 2009 and offering not only a safe haven from concerns about the banking sector but also an investment opportunity in its own right. Even now, with the worst of the crisis thought to be over, gold is proving an attractive investment option.

"Economic uncertainty is still out there," Eily Ong, a research manager at the WGC, said. "The recovery is very slow and because of the strong performance of gold in recent years it is good for investors looking for diversification into low-volatility assets."

Notwithstanding investors' scepticism, improving economic conditions have helped to boost the gold needed by the electronics sector as consumer markets start to recover. Industrial demand for gold rose by 24 per cent in the second quarter, although the amount of the metal used in dental operations fell to an all-time low of 12.4 tonnes.

But strong rising prices are starting to bear down on global jewellery markets. Total global demand for gold jewellery fell by 5 per cent to 409 tonnes in the three months to the end of June. Only five countries saw a boost, with Hong Kong's 34 per cent growth the strongest performance overall. But the world's biggest market, in India, dropped by 2 per cent, and in worst-hit Thailand jewellery demand was down by 40 per cent. Given the major price rises in recent years, jewellery demand has remained surprisingly resilient, according to the WGC. "Particularly since the start of this year consumers are becoming accustomed to higher prices for jewellery because although there is a strong increase in the average gold price there has been only a small drop in demand," Ms Ong said.

Strong growth in the total gold market is expected to continue for the rest of the year, driven by Indian and Chinese demand and ongoing concerns over the European economy.

Over the longer term, China is likely to take a more prominent role in the investment market as its nascent market gathers strength.