Global gold demand is expected to rebound this year as investors buy the metal as a safe store of value amid volatility in the financial markets, and as consumers become accustomed to higher prices, the World Gold Council said.

Speaking as the WGC unveiled its first-quarter Gold Demand Trends report, investment research manager Eily Ong said she expected gold demand to be well supported this year despite a 25 per cent drop seen in the first quarter of the year.

That decline largely came as a result of a sharp slide in buying of gold for physically-backed exchange-traded funds, which plummeted 99 per cent from early 2009's record high levels, to just 3.8 tonnes from 465.1 tonnes a year earlier.

'ETF flows paused in the first quarter of this year, but we have seen since April and May that flows into gold ETFs have risen strongly,' Ong said.

'Anecdotal evidence from the numbers we have seen... over the last two months shows investors are moving to gold for its diversification properties, it being a less volatile investment, (and) to protect their wealth.'

'The momentum that has picked up since the second quarter this year could help lift investment demand in the rest of 2010,' she added.

Holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, rose 9.5 per cent or 107 tonnes in the second quarter to May 24, against a drop of 3.8 tonnes in the first quarter.

World gold jewellery consumption rose by 43 per cent in tonnage terms in the first quarter to 470.7 tonnes, led by a sharp rise in Indian jewellery buying, which slipped sharply last year as prices rose.

Expectations adjusted

'Consumers seem to have adjusted their price expectations in the face of higher prices,' said Ong. 'That is very important, particularly in the Indian market, which is the largest market in terms of global demand and jewellery.'

Jewellery consumption in India nearly quadrupled in tonnage terms to 147.5 tonnes from 37.7 tonnes in the first quarter of 2009, the WGC said, when a sharp rise in prices hammered buying.

Ong says Indian gold demand had strengthened after a weak 2009 after the Reserve Bank of India's purchase of 200 tonnes of gold from the International Monetary Fund last autumn.

'We believe that transaction has actually helped to fuel the perception among Indian buyers that gold is reliable and a capital-preserving asset,' she said.

'It has underpinned positive sentiment towards gold among Indian consumers.'     Greater Chinese jewellery demand -- encompassing China, Hong Kong and Taiwan -- also rose 11 per cent in the first quarter, while demand from the Middle East rose 23 per cent and from Turkey by 12 per cent.

India and China are expected to remain by far the biggest the main gold-buying markets in 2010, Ong said, although demand from Europe and the United States is also expected to recover.

In terms of supply, mine output edged up 5 per cent in the first quarter, but overall supply dropped 26 per cent to 926 tonnes, with the WGC noting a 43 per cent fall in scrap gold supply to the market from early 2009's extremely high levels.

A flood of scrap gold onto the market in that period has reduced the amount of readily available material, Ong said.

'The continued drop in recycled flows since that spike in Q1 2009 in spite of the higher price... actually reflects an exhaustion of near-market supply of gold available for recycling,' she said.

'We believe that for recycling to increase again, considerably higher price will be required to flush out those less readily available supplies of scrap.'     Spot gold prices rose to a record $1,248.95 an ounce earlier this month, and are currently holding around $1,200.

Industrial and dental demand for gold rose 31 per cent to 103.2 tonnes in the first quarter, from 79 tonnes in the same period of 2009. The WGC said the rise reflected improved economic conditions. – Reuters