With financial markets still reeling from the global credit squeeze, and growing inflationary pressures dollar demand for gold reached US $20.9bn in the first quarter of 2008, a 20% increase over the same period in 2007 and more than double the level of four years earlier.

However, tonnage demand for gold at 701 tonnes was down 16% on the same period last year and represents the lowest quarterly figure for five years, according to Gold Demand Trends, which is released today by World Gold Council (WGC). This fall was caused primarily by the sharp rise and unusually high volatility in the gold price, which briefly touched record levels above $1,000/oz in mid-March.

The data, compiled independently for WGC by GFMS Ltd, show that the impact of these factors hit home particularly hard in the “physical buying” markets of gold jewellery and coins and bars. Jewellery demand declined 21% year-on-year to 445.4 tonnes, the lowest quarterly level since the early 1990s. Net retail investment demand dropped by 35% to 72.7 tonnes in Q1.

There was a stark contrast in the gold exchange traded fund (ETF) market, however, where a combination of continuing instability in the equities markets, ongoing fears over the dollar and rising inflation, and increased understanding of gold’s investment attributes helped spur demand. Demand for gold ETFs was up 100% on Q1 2007 at 73 tonnes for the quarter - representing $2.2 billion in dollar terms.

Positive news also came from two of the world’s biggest emerging economies with overall demand for gold in China and Russia up 15% and 9% respectively on the same period last year, driven by increasing consumer wealth and ease of access to attractive jewellery and retail investment products. (more…)