>Gold to remain supported by economy, diversification

London - Gold demand in the first quarter rose, but there were large differences in demand geographically, with some parts of the world selling precious metal holdings while western economies piled into the metal, the World Gold Council said Wednesday.

Global gold demand rose in the first quarter to total 1,028 metric tons, up 35% on the year. Demand for exchange traded funds, bars and coins offset a decline in jewelry sales and industrial demand elsewhere, the WGC data showed in its Gold Demand Trends report.

Bar hoarding, which largely covers the non-western markets, shifted from a net inflow of 49.4 tons in the first quarter last year to a net outflow, or dishoarding, of 33.2 tons in the first quarter of 2009.

In contrast, other net retail investment, which covers western investor activity in the secondary retail market rose from 9.8 tons to 89.0 tons.

"Non-western markets have heavily succumbed to profit-taking activity of late," the WGC said.

For example, while ETF demand rose more than six times in the first quarter from a year ago to total 465 tons, jewelry demand fell 26% to total 352 tons.

Markets such as India and the Middle East are large jewelry consumers with India being the largest.

"The important factor is that other sectors are taking jewelry's place," said Rozanna Wozniak, investment research manager at the WGC. "And some consumers in India may buy gold on dips."

A recovery in jewelry demand will depend somewhat on the gold price - lower prices tend to spur more buying. However, with economies remaining weak and some forecast to post further losses in growth, jewelry demand could remain under pressure, the WGC said.

Institutional gold demand also appears to have risen in the first quarter, the WGC said.

Inferred investment rose, not due to a rebuilding of speculative positions, but instead demand for larger bars over 1 kilogram rose by 29% to total 115.3 tons, the WGC estimates.

Global gold supply rose 34% on the year to total 1,144 tons in the first quarter of the year.

The growth in supply came largely from gold jewelry recycling flows, which rose 55% on the year to total 558 tons. Mine production rose 3% to total 560 tons in the first quarter, helped by some new projects.

Supply was also boosted by a decline in central bank gold sales to 35 tons, down 54% from the first quarter last year and a drop in producer dehedging.

"Overall I expect investor interest to be underpinned because investors are rethinking allocations seeing gold's role longer term as insurance rather than just a safe haven," Wozniak said.

Source: COMMODITIESCONTROL