Gold Demand to Increase Despite Temporary Blip: WGC

Despite demand for gold falling to 17 percent in the second quarter compared to the same period in 2010, the World Gold Council says that full-year demand will increase because of a rush to safe haven assets as market volatility has ramped up.

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"What you've seen in this quarter is that it fell in tonnage terms but in value terms it was the second highest quarter on record, partly because of a rise in the gold price," Marcus Grubb, managing director at the World Gold Council, told CNBC, Thursday.

Ongoing macro economic uncertainty, the continued sovereign debt crisis in Europeand widespread inflationary pressures will result in gold demand remaining strong, he added.

However, he said the fall in tonnage terms was down to an increase in ETF redemptions in the second quarter compared with the same period last year.

"My view is that ETFs are following the physical (gold price) but it would be unfair to say they are driving the price of gold," he said.

India and China, traditionally markets with a high consumption for gold jewelry accounted for 55 percent of demand and 52 percent of total bar and coin investment.

The WGC expects this to continue with forthcoming gold purchasing festivals and the start of the wedding season in India later in the year.

In addition central banks were net purchasers of gold during the second quarter of 2011.

"Other demand drivers are the central banks this year, an unbelievable number, 69 tons in this quarter of purchasing when in the past they have sold 450 tons a year for the past twenty years – which is a 500 ton swing in the demand side just from central banks in the last 18 months," Grubb said.

Venezuela's president Hugo Chavez confirmed Wednesday that he would nationalize the gold industry in the country.

Gold prices have been hovering around the $1,790 per ounce mark, coming off highs of over $1,800 as market volatility peaked last week.

Grubb added that analysts questioning whether such high gold prices – and their sustainability - were missing key demand drivers which underpinned the metal's price.

"China is now the largest producer and second-largest consumer after India and it is increasing its imports. Last year it imported 260 tons and the anecdotal evidence for this year suggests it will be much higher so the fundamental underpinning for the market is very strong," he said.