LONDON (Reuters) - Gold demand hit a four-year low in the second quarter, despite surging appetite for jewellery, coins and bars, as investors exited bullion funds and central bank buying more than halved, the World Gold Council said.
Lower prices following a selloff in April, when spot gold dropped $200 an ounce in two days in its sharpest slide in 30 years, and another retracement in June sent bar and coin demand to record highs and jewellery buying to its strongest in nearly five years.
That consumer demand rose by more than half to 1,083 tonnes in the three months to end-June from a year earlier, the WGC said.
But a 402.2 tonne outflow from gold-backed exchange-traded funds - popular investment products that issue securities backed by physical gold - and a 93.4 tonne drop in central bank purchases knocked overall demand down 12 percent to a net 856.3 tonnes, its lowest since the second quarter of 2009.
"It's clear that this will be a down year in tonnage terms for demand," the WGC's managing director for investment, Marcus Grubb, said on Thursday.
"The key will be how successfully that gold coming back in from the ETFs is re-absorbed by the other categories of investment and other areas that are growing strongly, like jewellery demand."
The heavy liquidation from gold-backed ETFs in the second quarter brought outflows for the year to 578.7 tonnes. The WGC said speculation the Federal Reserve might be set to curb its bullion-friendly quantitative easing had spooked investors.
Prominent U.S. hedge fund Paulson & Co more than halved its stake in the world's biggest gold-backed ETF, SPDR Gold Trust, in the second quarter, a filing with the U.S. Securities and Exchange Commission showed on Wednesday.
Gold prices have fallen by around a fifth this year, hitting a three-year low in June of $1,180.71 an ounce. They are currently at around $1,320, some $600 below their September 2011 record high of $1,920.30 an ounce.
The WGC said it expected central bank purchases this year to fall to 300-350 tonnes from 544.4 tonnes in 2012, after a 100-tonne drop in the first half.
This year's price volatility is likely to have affected the timing of central banks' gold buying, Grubb said.
"We would have expected more buying on the price dip, but also sentiment in the second quarter was negative - many (expected) gold would fall further - so we think this is a delay in purchasing rather than a change in strategy." Grubb told the Reuters Global Gold Forum on Thursday.
For graphic on 2013 asset returns: click link.reuters.com/dub25t
ETF liquidation and lower central bank demand outweighed a broad-based surge in consumer buying. Demand in India and China, the largest consumers of physical gold, for jewellery, coins and bars soared by 71 percent to 310.0 tonnes and 87 percent to 275.7 tonnes, respectively.
China was the biggest market for gold bars and coins as demand more than doubled in the two countries. India led jewellery demand, with consumption of 188.0 tonnes.
Global jewellery demand for gold, which has fallen in recent years as higher bullion prices deterred buyers, rose more than a third in the second quarter to 575.5 tonnes.
In the Middle East, demand for jewellery increased by a third, and coins and bar offtake by two-thirds. Turkish consumer demand rose 73 percent to 64.3 tonnes.
U.S. jewellery demand rose 2 percent to 20.3 tonnes, its second successive quarterly increase after it climbed for the first time since 2005 in the first three months of the year.
"Some of that is due to the impact of lower prices, but it's also due to the impact of a gradually improving economy in the United States," Grubb said. "We do expect that turnaround in the U.S. to continue."
U.S. coin and bar demand nearly doubled to 24.3 tonnes, while European bar and coin demand rose 14 percent to 85.8 tonnes. Jewellery demand softened a touch in Europe, however, with declines reported in the UK and Italy.
On the other side of the market, gold supply fell to 1,025.5 tonnes from 1,087.9 tonnes in the second quarter of last year. Mine supply rose 18.2 tonnes to 717.2 tonnes, but flows of scrap gold onto the market dropped by a fifth to 308.3 tonnes as prices fell, giving sellers less incentive to cash in.
"That's the weakest recycling number we've had for many quarters, and it reflects the price action in April," said Grubb.
Source: Thomson Reuters GFMS/World Gold Council, Gold Demand Trends, Q2 2013
Reporting by Jan Harvey; editing by Dale Hudson and Jane Baird