JOHANNESBURG (miningweekly.com) – An upturn in the gold price is likely once current Greek turmoil crystalises, says World Gold Council (WGC) investment MD Marcus Grubb.

Current global macroeconomic concern is seen as a contributing factor to gold’s gradual fall since the end of February, when US Federal Reserve chairperson Ben Bernanke revealed that there would be no more quantitative easing in the near term in the US, which also led to a sharp fall in equities.

“It’s not a gold phenomenon. We’re basically seeing investors raising cash weightings again as the international economic picture begins to look deeply concerning again. There are also rumours of more bank rating downgrades to come,” Grubb tells Mining Weekly Online.

In addition to the Greece and eurozone issues, there are also lingering concerns about the technical recession the UK and nonfarm payroll numbers coming in below expectation in the US after three months of more bullish economic data.

Investor response has been to sell assets that are in the money, like gold, and move into dollars, US treasuries and sovereign debt as a hedge.

However, should Greece exit the euro and devalue its currency significantly, Grubb sees gold’s qualities as a hedge against inflation risk, currency depreciation and market volatility returning to the fore.

The WGC anticipates that gold – which continues to be underpinned by China, central banks and exchange-traded fund (ETF) investment – will remain in a bull market for the balance of 2012.

Asia is poised to provide a billion new consumers in the next decade, along with high savings ratios.

Even with its slowing economy, China is expected to provide strong gold demand in the second quarter (Q2), when demand in India is also likely to recover.

While the WGC’s latest Gold Demand Trends' report isolates jewellery weakness and a poor Indian first-quarter (Q1) as the cause of demand falling 5% to 1 097.6 t, from Q1 2011’s high of 1 150.7 t, the strong quarter in China saw Chinese demand rise 10% to 255.2 t, which took up much of the slack from India, as did 13% higher investment demand of 389 t.

China, which is expected to become the world’s largest gold market by the end of the year in terms of yearly demand, was larger than India in both jewellery and investment in Q1.

India came in overall at 207 t, which was 29% down owing to two import tax hikes, which saw a rise from 1% to 4%, and the imposition of a now-rescinded excise duty on certain large branded jewellery products, which resulted in a prolongrd strike that disrupted the market.

Gold demand value was, however, 16% up year-on-year at $59.7-billion, the average Q1 gold price being $1 690.57, 22% higher than the Q1 2011 average.

Demand for the quarter was underpinned by increased demand in China, continued central bank purchasing and inflows into ETFs.

Q1 demand for ETFs and similar products totalled 51.4 t, equivalent to a value of $2.8-billion, in stark contrast to Q1 2011, when the sector witnessed net outflows.

Net new investment in physical gold took place despite the current gold price being flat on the year at around $1 540/oz, indicating that ETF demand is stickier than many believe.

The 81 t bought by central banks is one of the highest quarterly results since the banks became net buyers and puts the WGC on track to realise its 300-ton- to 400-ton-by-year-end target.

The bulk of central bank buying was from Eastern Europe, with Russia and Kazakhstan adding to their holdings, and from Mexico, which made its largest single 16.8 t purchase.

Q1 central bank buying shows an increase in the diversification of emerging markets away from the euro and the dollar plus fear of eurozone sovereign debt issues.

There was no extraordinary increase in gold-mine supply, which rose by a steady 3%, compared with recycling’s 11% rise and insignificant hedging.