Strong investment demand helped lift total second-quarter gold consumption by 15% on the year to 1,050 mt, more than compensating for a sharp drop in physical demand, the World Gold Council said in its quarterly report Thursday.
On a quarterly basis, total demand slipped 18% from 1,285 mt in Q1, when demand peaked at a three-year high.
In the first half of the year, demand totaled 2,336 mt, up 18% on the year, largely due to record levels of investment demand, the industry body said.
Investment demand in the first half of 2016 was the highest on record at 1,064 mt, more than twice the 469 mt a year earlier, and was the first time investment has been the largest component of gold demand for two consecutive quarters.
"The speed of the upswing in investment was in no small part due to the scale of pent-up demand that had built in Western markets," the report said.
"The trend continued in the second quarter. Investors who had been awaiting a catalyst to enter (or re-enter) the market found they had reason enough to do so."
Investment demand, which includes gold bar and coin demand, as well as inflows into gold-backed ETFs, totaled 448 mt in Q2, up over 140% from a year earlier. The total declined from Q1 by 27%, but again, was down from record highs.
Rising levels of global uncertainty and increasingly looser global monetary policy, including negative yields, all helped boost investment demand this year, the WGC said, as well as a sharp rise in gold prices.
Up 25% in dollar terms from January to June represents the strongest first-half performance for gold since 1980, but the sharp rise has also contributed to a sharp fall in physical demand, especially in Asian markets.
Total jewelry demand dropped 14% on the year to 444 mt in Q2, the lowest total for six years, with a fall in H1 jewelry demand down 17% on the year to 925 mt.
This included a sharp fall from the two largest markets, India and China, which account for over half the world's physical consumption.
Chinese jewelry demand declined 15% on the year to 154 mt in Q2, with Indian demand falling 20% to 98 mt.
First-half jewelry demand in China dropped to its lowest since 2012 at 323 mt, with demand in India the lowest since 2009, at 186 mt.
At the same time total supply continued to rise, largely due to increased recycling. Mine supply was flat at 787 mt in Q2, while recycled gold increased 23% on the year to 328 mt, resulting in an increase of total supply of 10% to 1,042 mt.
"Production levels continue to plateau, a consequence of cost management which has been the focus of the industry for the last couple of years," the WGC said.
Notably, producer hedging -- the selling forward of unmined gold -- increased in Q2 to 30 mt from 15 mt of de-hedging a year earlier.
With four consecutive quarters of increases the global hedge book has risen to over 300 mt, the WGC said, the highest since 2009. But it remains only a 10th of what it was 15 years ago.
