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Gold demand falls on weakness in China, India

August 16, 2012: 1:07 PM ET

Global demand for gold sank in the second quarter as buyers in China and India slowed their purchases of the precious metal, according to a report Thursday.

The World Gold Council said gold demand fell 7% in the second quarter from the same quarter last year.

The drop in demand came as gold prices averaged $1,609.49 in the quarter, up 7% from the average price in the same quarter last year.

Gold prices have risen sharply since the financial crisis struck in 2008 as investors flocked to the metal for safety. But the rally has lost momentum this year, with prices falling in 5 of the past 7 months.

Related: What's an Olympic gold medal worth?

In the second quarter, investors were unimpressed with the trend in gold prices, which never rose or fell more than $100 per ounce, according to the council.

"The lack of a clear price trend generated a mixed response among gold consumers, particularly in the investment arena," the report reads. "While some investors used this pause in the price to add to their investments, others chose to liquidate and realize profits."

Overall, the decline in demand was most pronounced in China and India, which together accounted for nearly half of global demand for gold jewelry, bars and coins.

Chinese investors were turned off by the tepid price action in the gold market, while consumers in China were less willing to splurge on jewelry as the economy there slows.

In India, gold prices in rupee terms rose to a record high as the currency weakened against the U.S. dollar, weighing on consumer demand. In addition, gold prices were driven higher by import duties imposed by the Indian government, said Ross Strachan,  a commodities economist at Capital Economics in London.

But the rupee has since regained some of its value against the dollar and the duties have been withdrawn, so gold demand in India could rebound in the second half of the year, Strachan said.

Related: Why Warren Buffett may be wrong on gold

Despite the overall decline in gold demand in the quarter, there was record buying of gold by global central banks, particularly those in developing countries.

Gold purchases by the official sector, mainly central banks, more than doubled in the quarter, according to the World Gold Council. This was the largest amount of gold purchased by global central banks since the second quarter of 2009, when the sector became a net buyer for the first time.

Central bank demand has been "an important structural change in gold market," said Strachan. In the second quarter, he said central banks took advantage of dips in gold prices price to bolster their reserves.

Looking ahead, Strachan said gold prices could rebound later in the year if conditions in the euro area take a turn for the worse. Specifically, he said the likelihood that one or more country exits the currency union would lead to "extremely strong investment demand" for gold.

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Ben Rooney
Ben Rooney
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Ben Rooney is a staff writer for CNNMoney. He covers the European debt crisis and other international finance stories, in addition to writing about stocks, bonds, investing and other Wall Street-related news. Follow Ben on Twitter: @ben_rooney

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