China's gold demand hit a record high in the first quarter on investor worries over inflation and property market curbs, the World Gold Council said on Thursday, bucking a lower trend in global consumption driven by higher gold prices.

Global gold demand fell 5 percent on the year to 1,097.6 tonnes in the first three months of 2012, as jewellery and technology sectors bought less gold with average prices up 22 percent from a year earlier, but investment demand and central bank buying helped cushion the fall, the industry group said.

China remained the world's top gold consumer for the second quarter in a row, with its gold consumer demand up 10 percent to 255.2 tonnes, beating India's 207.6 tonnes, which was a 29 percent decline on the year.

"Further growth is expected (in China): investors remain wary of high inflation rates; and property market restrictions continue to drive demand for gold among investors seeking access to real assets," said the WGC in its quarterly Gold Demand Trends report.

China's physical gold bars and coins demand rose 13 percent on the year to a quarterly record of 98.6 tonnes, while jewellery demand climbed 8 percent to 156.6 tonnes and accounted for 30 percent of the world's gold jewellery market, the WGC data showed.

The WGC said investment demand in China going forward will depend on price expectations, and the performance of other assets such as property and the domestic stock market, but inflation will continue to be a concern to investors.

The country's gold jewellery demand is likely to remain on a more moderate growth path as the market matures and economic growth cools, it said.
 
Spot gold averaged $1,690 an ounce in the first quarter, up from $1,387 a year earlier. Prices have declined to below $1,550 this week.

India's vast gold jewellery market suffered a 19 percent drop in demand in the first quarter of the year, and investment demand tumbled 46 percent, pressured by a weak and volatile rupee among other factors.

A three-week nation-wide strike among jewellers after the government announced plans to double import tax to 4 percent on bullion and double the duty on non-standard gold and gold jewellery to 10 percent hit retail demand.

"It is likely that this impact will reverse to some extent in the second quarter, as the supply chain readjusts following the three-week shutdown," said the WGC.

The group said the sharp drop in investment demand is partly indicative of considerable stock depletion by bullion dealers, given the uncertainty surrounding the potential impact from hikes in the import tax and excise duty. The 10 percent excise duty on non-branded jewellery was later withdrawn by the government.

"Expectations are for Indian investment to recover during the current quarter as the market adjusts to the new legislation and tax structure, particularly if prices dip," said the WGC.

The official sector remained a net gold purchaser in the first quarter, although the volume at 80.8 tonnes showed a 41 percent decline from the first quarter of 2011 which witnessed an exceptional level of central bank buying, said the WGC.

Russia, Mexico, Kazakhstan, the Philippines, Belarus, Ukraine and Tajikstan all added to their official gold reserves in the quarter.     

The WGC expected the trend of net central bank buying to continue this year as the main driving factors remain in place, as some countries seek to diversify their foreign reserves and others try to increase gold holdings to maintain the ratio of gold to their foreign reserves.     

Global investment demand in gold grew 13 percent on year to 389.3 tonnes, as exchange-traded products recorded a 51.4-tonne inflow while demand in bars and coins recorded a 17-percent decrease from a year earlier. - Reuters