Investment is likely to continue making up the lion's share of gold demand this year, the World Gold Council's investment research manager said, after it surged in the first half of 2009 to almost 50 per cent of consumption.
Nonetheless jewellery buyers, typically the main drivers of gold demand, may be tempted back to the market later in the year should gold prices fall and fresh signs of economic recovery emerge, Rozanna Wozniak added.
Ms. Wozniak said while jewellery and investment demand is being battered by the economic downturn, which has curbed consumer buying of gold, investment has benefited from the same instability.
"What we have is two sectors (industrial and jewellery demand) which are largely cyclical in nature - as economic activity slows, that is obviously going to have an effect to some degree - and a countercyclical element of investment," she said.
"At times, jewellery will take up the slack, and at times investment will take up the slack."
With jewellery buying representing only 43 per cent of demand in the first half, the market has changed significantly from the first six months of 2008, when it made up 63 per cent of consumption against only 21 per cent for investment demand.
Ms. Wozniak said the diversification of gold demand away from its heavy reliance on the jewellery sector, primarily in India, was a positive step for the market. According to metals consultancy GFMS, Indian jewellery buying in 2004 made up more than a fifth of total gold fabrication demand.
"What we are seeing is different parts of the market being able to play a role," she said.
"While historically, India would have been the biggest driver and everyone was totally focused on that, we are seeing more balanced sources of demand, different drivers. So no one single (sector) will necessarily be the be-all and end-all."
Nonetheless, she said, jewellers may return to the market later in the year after de-stocking heavily in earlier months as high prices discouraged them for making fresh purchases.
"Conditions for the jewellery sector still remain quite difficult and while economic conditions are in some places stabilizing... rising unemployment is weighing on consumer confidence," she said.
"However, there are some traditional jewellery markets where those buyers have been waiting on the sidelines. Sooner or later they are going to have to decide whether they are going to keep waiting for the bigger dips, or whether they will make a decision to buy."
Since the second quarter of 2008, instability in the financial markets and rising interest in gold as a hedge against that volatility has fuelled heavy buying of gold investment products such as exchange-traded funds.
ETF flows hit a record high of 465.10 tonnes in the first three months of the year. These slowed to 56.7 tonnes in the second quarter, but are still well ahead of the comparable figure from Q2 2008 of 4 tonnes.
Ms. Wozniak said although flows had slowed considerably, they remained a significant support factor for the market.
"While some of those investor flows have abated from the extremes we saw during the peak of the crisis, they are still running well above the levels of last year," she said.
"We have seen confidence coming back into the markets and people willing to take on more risk, but those holdings in the GLD ( the largest gold ETF ) have been pretty stable."