A record $11.4bn was spent on gold jewellery by consumers in the second quarter, but underlying demand was hit by an increase in price volatility, according to the World Gold Council.
Gold hit a 26-year high of $730 a troy ounce in May but only held above the $700 level for three trading sessions, and the second quarter was marked by a sharp increase in volatility. Prices varied across a $165 an ounce range.
In the face of increased price volatility, jewellery buyers in markets in much of Asia, notably India, and the Middle East were reluctant to buy. This was reflected in a 24 per cent decline in gold jewellery demand in tonnage terms in the second quarter compared with the same period a year ago to 562.5 tonnes, although total spending on jewellery rose 12 per cent.
The jewellery market accounts for 70 per cent of all gold demand. An increasing appetite for gold jewellery is evident among the rapidly expanding middle class in developing countries, with more women opting to buy for themselves. The WGC estimates that its core target groups of women in four markets - China, India, Saudi Arabia and the US - have risen by 56m since 2002 to more than 150m.
Investment inflows into gold exchange traded funds rose 39.1m tonnes in the second quarter to the equivalent of 535m tonnes. This helped drive a 19 per cent increase in total investment demand (which includes retail spending on gold coins and bars) to 129.7 tonnes.
Industrial demand remained steady in the second quarter, down just 2 per cent in tonnage terms.
Official sales by central banks fell sharply in the second quarter, down 63 per cent year-on-year in tonnage terms. The current Central Bank Gold Agreement year ends on September 26. Sales are estimated to be 160 tonnes short of the 500 tonne limit.
The shortfall cannot be made up in future years. Some traders fear this has created a potential market overhang if there is a rush to sell bullion before the deadline, but others see the shortfall as indicative of an important shift in attitude to gold sales by central banks.
Mine supply remains slow to react to high prices, with an increase of just 2 per cent in output to 625 tonnes.
The second quarter was also marked by producer de hedging of 157 tonnes. Barrick Gold contributed 93 tonnes as it effectively completed a de-hedging programme previously expected to take the whole of the year.