After a 12-year bull run peaked in 2011, global prices ofthe safe haven metal have struggled to gain traction. Last week,gold sank to $1,077 per ounce, its lowest in 5-1/2 years, aftera sudden sell-off in New York and Shanghai, as investors worriedabout Chinese growth and the prospect of U.S. interest raterises made the dollar more attractive.
Demand for gold slid toits lowest in six years in the second quarter of this year asbuyers from top consumer China poured funds into its nowtroubled equities market, an industry report showed on Tuesday.
Retail investment from China fell by a quarter and jewellerydemand by 23 percent in the April to June period as stockmarkets there soared, GFMS said in a quarterly update.
However, a subsequent plunge in Chinese share prices frommid-June has not helped bullion, it said, as some investors werelocked in and others nervous about switching to different assetclasses while financial markets are so volatile.
After a 12-year bull run peaked in 2011, global prices ofthe safe haven metal have struggled to gain traction. Last week,gold sank to $1,077 per ounce, its lowest in 5-1/2 years, aftera sudden sell-off in New York and Shanghai, as investors worriedabout Chinese growth and the prospect of U.S. interest raterises made the dollar more attractive.
"Gold has certainly moved out of favour in China in recentquarters," GFMS analyst Andrew Leyland said.
"I think Chinese demand was a reaction to weak priceperformance, rather than a cause. Both the equity market, andthe U.S. dollar have promised stronger returns than gold, andthis put investors off the yellow metal."
GFMS was cautiously optimistic that both demand and pricescould start to pick up in the final quarter of the year.
"Chinese purchasers tend to buy into rallies, so when goldgets some upward momentum Chinese purchasing should supportthis," Leyland said.
China and India are the world's top gold consumers. Physicaldemand there has not picked up strongly despite a sell-off lastweek that knocked global prices to 5-1/2 year lows.
That contrasts to the explosion in physical demand seenafter gold prices dropped sharply in the second quarter of 2013.
GFMS, a division of Thomson Reuters, said global demand forgold bars and coins fell 12 percent year-on-year in April-Juneand was around 63 percent below the peak two years ago.
In the largest consuming sector, jewellery, consumptiondropped 9 percent and production declined 6 percent, GFMS said.Overall physical demand stood at 858 tonnes in the secondquarter, down 14.2 percent from a year before.
Central banks remained net buyers of gold, but theirpurchases fell 62 percent year on year.
That helped push the physical surplus in the gold market toits highest in five years at 196 tonnes, more than double thetotal of a year before.
While jewellery consumption in India increased 2.5 percentto 158 tonnes during the period, gross imports fell 10 percentto the lowest in five quarters, the report said.
China and India consumed almost the same amount of gold inJanuary-June, with China a tad higher at 394 tonnes againstIndia's 392 tonnes, it said.
GFMS forecast gold would average $1,135 an ounce in thethird quarter against $1,192 in April-June, before recovering to$1,175 in the last quarter of the year.
"It remains our view that a U.S. rate hike this year isalready priced into the market and that an increase could wellprompt a review of asset allocations that leads to an increasein gold holdings," the report said.
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