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Gold demand upbeat despite pressure on jewellry & high prices
Improving Indian economy provides positive outlook for Jewellery Demand
Investment demand for gold remained very strong in the second quarter of 2009, rising 46% on a year earlier levels as investors according to the Q2009 Gold Demand Trends report published today by World Gold Council (WGC). Although gold demand remains very high on a historical basis, total demand in 2009 was down 9% on the levels of a year earlier, a 6% decline in US$ value terms to US$ 21.3b.

Demand to Go up :
In India, despite domestic economic pressures and sustained near-record local gold prices, second quarter gold demand recovered from the exceptionally weak levels witnessed in the previous quarter, rising from 17.7 tonnes in Q1'09 to 109.0 tonnes in Q2'09. However, total demand remained well below year-earlier levels. Total gold off-take was down 38% on 02'08, with jewellery, the largest component of demand, falling 31%.

Retail investment demand returned to positive levels from the dishoarding seen during the first quarter, but was nevertheless weak in comparison to year-earlier totals. Demand for bars and coins, at 21.0 tonnes, was less than half the 48.1 tonnes recorded in Q2'08.

Aram Shishmanian, CEO of World Gold Council, commented: "Despite the recent near-record rupee prices, investor appetite and consumer affinity for gold remains healthy. While the most recent quarter-on-quarter improvement was in large part a seasonal improvement, we expect a healthy rebound in activity. A stronger economic outlook than many regions, and the forthcoming festival season suggest that demand for gold will continue to build on recent trends. We expect consumers, investors and the trade to look for opportunities to buy following an exceptional period of profit-taking and de-stocking.

Excellent Quarter for Gold Demand :
"More widely, this is another excellent quarter for global gold demand as gold's unique properties and broad demand and supply base continue to sustain a vibrant market and support the price. Although demand failed to match the exceptional levels seen in previous quarters when the economic and financial crisis was at its peak, demand nevertheless remained very robust throughout the quarter. Investment demand, in particular, witnessed a strong quarter and we believe this indicates a growing recognition of gold as an important and independent asset class.

Jewellery Buy-back Opportunity :
"The global economic downturn has certainly had a major impact on the purchasing power of gold consumers, as have the high local prices and dollar volatility. However, we continue to see pockets of solid demand in many nonwestern markets on dips in the gold price. We expect consumers, particularly in India, to look for opportunities to buy back the jewellery that has been recycled over recent quarters."

The figures, compiled independently for WGC by GFMS Limited, show that total global identifiable investment demand for gold, which includes exchange-traded funds (ETFs) and bars and coins, remained very strong. Investment demand rose to 222 tonnes, a 46% increase on year-earlier levels, but below the extreme highs experienced during the previous three quarters when the economic and financial crisis was at its peak.

Investment Up :
Global retail investment, which includes demand for physical gold in the form of bars and coins, had another healthy quarter. Net retail investment was up 23% relative to the previous quarter and 12% on the levels of Q2'08 as investors, specifically those in western countries, continued to seek out gold for its unique wealth preservation qualities. Flows into gold ETFs returned to a more moderate, but historically robust level of 57 tonnes after an exceptional first quarter that saw net inflows total 465 tonnes. Inferred investment, which covers the less visible part of gold demand, stood at 195 tonnes in Q2, up from 10 tonnes for the same period last year. This rise reflected a significant increase in gold held by investors, wary of counterparty risk, in allocated gold accounts.
Decline in Demand Starts Stabilizing :
In the US, total gold off-take in Q2'09 was 10% above the levels of Q2'08, equivalent to a rise of 13% in US$ value terms, driven by retail investment demand which rose by 91%. Jewellery off-take in Q2 was down 19% in tonnage terms on the levels of Q2'08, and in US$ value terms, the result was broadly similar at -17%. Notably, those rates of decline were significantly less severe than those seen in Q4 2008 or Q1 2009, suggesting that the declining trend in demand may be starting to stabilize.

Total Supply Cut back:
Total supply of gold was up 14% relative to year-earlier levels at 927 tonnes, driven by lower levels of producer de-hedging, with mine output and recycling activity making a smaller contribution. Q2'09 supply was nevertheless 23% below the levels of the previous quarter. The main contributor was a 41% reduction in recycled gold, suggesting that profit-taking and distress selling has decreased. The central bank sector had a dampening impact on supply -net purchases of 14 tonnes were recorded in Q2'09 compared to net sales of 69 tonnes in Q2'08, the figures indicating the first net purchase by central banks for a considerable length of time.