Investors Buy Gold In Second Quarter

NEW YORK (TheStreet ) -- Rising gold prices are propelling gold investment demand to record levels but could kill gold jewelry consumers.

According to the World Gold Council's Gold Demand Trend report for the second quarter, gold demand grew 36% to 1,050 tons largely due to a surge in identifiable investment demand.

Investors piled into gold in May and June for protection against Europe's ballooning sovereign debt crisis and a slowing economy in the U.S. Gold's safe haven appeal pushed prices to an intraday high of $1,264 an ounce.

There are multiple demand factors that move the gold price: jewelry, which accounts for 60% of overall demand, investment, 25%, and industrial and dental, 15%. The problem is that high gold prices don't mean higher demand in all these areas. According to the report, in the second quarter, industrial and dental demand remained constant, up 14%, identifiable investment demand grew 118%, but jewelry demand dropped 5%.

Jewelry demand hit a high in the fourth quarter of 2006 when the gold price traded in the $600 range, but since then has been unstable. Typically the lower the gold price, the more demand there is for jewelry, the more willing consumers are to buy. As the gold price hit record highs in the second quarter of 2010, demand struggled to keep up.

China and India are the largest consumers of gold jewelry in the world, accounting for 18.4% and 30% of total jewelry demand, respectively. Both countries have a long standing tradition of giving gold jewelry as gifts during festival and wedding seasons.

These markets are extremely price sensitive, however, and currently their consumers are tentative about buying gold at $1,200 and above. Consumption in India dropped 2% in the second quarter, while China saw demand increase by 5%, but it was led by a 34% surge in wealthy Hong Kong.

Jon Nadler, senior analyst at Kitco.com, says that gold dealers in India tell him "that customer orders are clustered at or $1,180 and below, and that preference among locals seems to be at or around those levels."

Analysts are now looking to the fall, which is typically a strong buying period for gold jewelry in China and India as Ramadan, India's post-monsoon wedding season, Diwali festival, and China's National Day give consumers plenty of reasons to buy gold jewelry.