Wary investors still want the safety of gold

Soaring retail investment fails to prevent 9 per cent fall in overall demand

Demand for gold among investors is still running 46 per cent higher than last year, despite signs of recovery in economies across the world. But overall demand for the yellow metal dipped by 9 per cent in the second quarter, compared with the same period in 2008, as the high price continued to squeeze jewellery purchasing, according to the World Gold Council (WGC).

Gold markets rocketed last year as the global economic crisis tore a hole in most other commodity prices. Although both jewellery demand and industrial activity stalled, investors who were spooked by the teetering banking system flocked to gold as a safe haven.

Investment appetites have calmed from the phenomenal 248 per cent boom in the first three months of this year. But the second quarter's 222 tonnes of demand for both exchange traded funds (ETFs) and the traditional bars and coins is still unusually high.

"Investment flows have eased off, but they are still running very, very strongly in historical terms," Rozanna Wozniak, an investment manager at the WGC, said. "Investors who were looking for a safe haven are now starting to see gold as an insurance policy, as a way to provide diversification in their portfolio. Very few assets are able to remain resilient in an economic crisis, so it makes sense to have a bit tucked away just in case."

From April to June, retail investment was the biggest growth area, shooting up by 23 per cent from the previous quarter to leave it 12 per cent up on the same period in 2008.

Investment flows into ETFs, while nowhere near the eye-popping 645-tonne first quarter, stabilised at a respectable 57 tonnes. "It was always going to be the case that when the economy worsened there would be an impact on both demand for jewellery and industrial activity, but where gold is different from other precious metals is that it has the counter-cyclical cushion of investment flows," Ms Wozniak said.

Industrial demand is still suffering, down by 21 per cent year-on-year, despite a massive 19 per cent gain from the previous quarter. Jewellery markets are also still depressed by the ballooning prices caused by such strong investment inflows. Overall demand for gold jewellery was down by 22 per cent in the second quarter, with the Indian market off by 31 per cent, the Middle East by 17 per cent, and the US by 19 per cent. The only exception was China, where demand rose by 9 per cent thanks to both the country's relative economic health and the fact that its currency is tied to the rising dollar.

The outlook for jewellery is starting to improve, according to the WGC. "In the current economic climate we would expect demand to remain soft, but buyers are starting to come back into the market," Ms Wozniak said.

India, for example, which is one of the world's biggest gold jewellery markets, saw a glut of individuals selling their gold in March to make the most of surging prices. But the sellers are now starting to look for opportunities to buy their jewellery back.

"We are cautiously optimistic, but so far people are in wait-and-see mode because they are not sure what is going to happen to the gold price," Ms Wozniak said.