Total identifiable gold demand for the third quarter reached 800.3 tonnes, or $24.7 billion in dollar terms, up 15 per cent from the second quarter, according to a report from the World Gold Council (WGC).

Jewellery and investment demand in non-western markets rebound from the very low levels seen in the first quarter, while industrial demand started to recover in response to an improvement in economic conditions, said the Q3’09 Gold Demand Trends Report, released by the WGC.

However, the report showed a 34 per cent drop on year earlier levels due to an exceptionally strong Q3’08, which saw soaring demand in response to the deepening global financial crisis and as many non-western markets responded to a dip in the gold price in that quarter. To address this, WGC compared Q3’09 against the five year Q3 demand average to 2007, which showed tonnage down just 4 per cent on this basis.

Total demand for gold in the Middle East region in Q3’09 was down a third when compared to the exceptionally strong quarter recorded in Q3’08, but up 6 per cent on Q2’09 levels.

When looking at the more representative five year September quarter average comparison, this shows a tonnage decline of 14 per cent. Jewellery demand for Q3’09 compared with Q3’08 was down 34 per cent (but up 2 per cent quarter on quarter), whilst retail investment demand was retail demand was down 11 per cent compared with Q3’08 (but up 71 per cent quarter on quarter).

“Whilst there are signs of improving levels of demand for gold in the region, it is too early to say when we might see a return to more traditional demand levels. The high gold price and recent local price volatility has been a major factor in impacting on demand, but this has also been coupled with ongoing regional economic uncertainty, particularly in Dubai, and a decline in tourist numbers,” stated Aram Shishmanian, chief of WGC.

“This quarter’s demand trends demonstrate the diverse and robust nature of the gold market which underpins the gold price. Early signs of economic recovery and improving consumer confidence have seen jewellery and industrial demand rise relative to last quarter, and the profit taking witnessed earlier in the year has markedly decreased.”

“The outlook for investment is positive overall with absolute levels of demand likely to remain well supported by continued economic and currency uncertainty, inflation concerns and the search for diversification. In the official sector, we expect to see a continuing trend of central banks diversifying their dollar exposure in favour of the proven store of value represented by gold.”

The figures, compiled independently for WGC by GFMS Limited, show that average gold prices for the quarter were 10 per cent higher than in Q3’08 at $960/oz. This rise was even stronger in a number of local currencies.

Jewellery demand was up 17 per cent quarter on quarter, due in part to seasonal factors. However, the high local pricing environment resulted in a 30 per cent drop in jewellery demand relative to year earlier levels.

Identifiable investment demand overall, which includes gold exchange traded funds and bars and coins, was 227.2 tonnes, a slight increase on Q2 levels, but down 46 per cent from the extreme highs of Q3’08.

The retail investment category, which includes demand in the form of bars and coins, again grew on a sequential basis, up 11 per cent, although it was 31 per cent lower than the third quarter of 2008. Flows into gold ETFs remained strong in absolute terms at 41.4 tonnes, although were again significantly lower than the relatively high figures recorded in Q3’08.

Inferred investment, which covers the less visible part of gold demand, experienced another quarter of net inflows. This inflow, of 30.7 tonnes was, however significantly lower than in the previous two quarters.

Industrial demand recorded its second consecutive quarter of improvement, with quarter on quarter demand up 6 per cent. Despite significantly lower tonnage demand compared to year earlier levels, there were some positive signs of an up-tick in end use demand, particularly within the electronics sector, which accounts for around 70 per cent of industrial off-take.

Total supply of gold contracted slightly in the third quarter at 833.0 tonnes, 8 per cent lower than the second quarter and 5 per cent below year earlier levels.

Mine production showed a firm improvement during the quarter, reaching 670.0 tonnes. The key factors weighing on supply were an increase in producer de-hedging and a negative contribution from the official sector, in addition to lower levels of scrap than previous quarters.