(Reuters) - Gold demand, which dropped in the second quarter of this year, is expected to strengthen by the end of 2011, driven by robust jewelry buying in India and China and recovery in investment demand, senior World Gold Council (WGC) officials said.

Overall gold demand fell 17 percent year-on-year in the three months from April to June to 919.8 tonnes, hammered by a sharp drop in investment demand which offset a tentative recovery in jewelry buying, the gold mining industry-funded WGC said in August.

In the third quarter, demand appears to have started to recover with increasing concerns about weakness of major global economies prompting investors to buy gold as safe haven while Asian consumers continued to splash out on jewelry, the WGC officials told Reuters on Friday.

"In the third quarter, we are going to see strong investment numbers, because of the European crisis, the debt downgrade in the United States and poor economic figures coming from the United States, which have created a concern in investors' mind that we may be heading back to another recession," WGC Managing Director for Investment Marcus Grubb said.

"It sends liquidity into gold," Grubb said in a telephone interview.

Gold-backed exchange-traded funds (ETFs), which experienced an 82 percent plunge in gold demand in the second quarter, have seen very large inflows in Europe and the United States at the beginning of the third quarter, Grubb said.

"We have not seen any significant redemptions so far," he said.

Economic gloom has also fueled investment into gold bars and coins on the western markets in the third quarter, he said.

Demand for gold bars and coins has been growing in Asian markets with concerns about inflation and a limited offer of alternative investment instruments pushing Indian and Chinese consumers to buy these gold products, Grubb said.

Central banks, which have purchased 198 tonnes of gold to boost reserves in the first six months of this year, have kept buying in the third quarter and are expected to continue this trend later in the year, he said.

Italy and other heavily indebted European countries are unlikely to turn to selling central bank gold to prop up budgets because the reserves are too small compared to their debt mountains and such moves would require considerable changes to local laws, he said.

EASTWARD SHIFT IN Jewelry DEMAND

Economic uncertainties will hit gold jewelry appetite in western markets where consumer demand has already weakened, David Lamb, WGC managing director for jewelry, told Reuters.

But jewelry buying in India and China -- which together account for 55 percent of global jewelry demand -- remains very strong in the short and longer term as the number of wealthy people is set to grow there, he said.

"If you add that up, because of the biggest and most dynamic move (in gold jewelry demand) eastwards, we think this year will show an overall positive trend," Lamb said.

High gold prices which have stormed a series of record highs this year have put off price-conscious consumers in the west and practically squeezed out gold jewelry from the low-end segments of the market there, but buying at the top end of the market has remained active, Lamb said.

"What is happening underneath is a significant tidal shift to the Asian markets, to India and China in particular, and gold rising upwards and disappearing from the mass merchandising in the west," he said.

Gold prices fell 2 percent on Friday, ending a volatile week when it traded in a near-$130 range, with traders blaming heavy fund liquidation of the metal on the New York futures market, and the downward move picking up momentum as sell stops were triggered.

But fundamentals of demand and supply remained bullish for gold, WGC's Grubb said.

"Against a very strong demand ... you also see a very slow increase in supply. I think it is very positive for the price," Grubb said, declining to give more precise forecasts.

(Editing by James Jukwey and Alison Birrane)

Source: http://www.reuters.com/article/2011/09/09/businesspro-us-gold-wgc-idUSTRE78844620110909