INTERNATIONAL. Gold investment as a proportion of total demand is expected to reach a new high in the quarter as the structure of the market is changing, according to a senior World Gold Council(WGC) official.

Marcus Grubb, managing director of investment research and marketing at the WGC, said: "You are seeing a shift in the dynamic of the gold market."

In 2008, Gold Investment demand accounted for 30% of overall gold demand, while jewellery demand contributed approximately 58% of the total.

Grubb explained that concerns over the global economy and a desire to diversify look set to reverse that trend.

Speaking this week at an ETF securities seminar in London, he said: "The structure of the gold market is changing. In the first quarter I think investment demand could be higher than 30%."

"ETF investment is in its infancy, and so is gold investment," he said. "Most allocations of gold are zero."

"You would only need a small shift in allocations to gold in segments of private and institutional wealth where they're not currently invested to have a major impact, when mining supply is only 2,400 tonnes a year."

He said gold supply was likely to be supported by scrap inflows, which he said will probably head above 1,500 tonnes this year, offsetting flat or slightly declining mine supply.

"The growth in investment is extremely strong," he said. "It is being led to some extent by ETFs."

"People are worried about the financial system, they're worried about credit, the issuance of paper, the bailouts... Many investors we talk to think that is going to create inflationary pressure in the world economy in the future," he said.

"You need an inflation hedge in your portfolio, and that is causing people to buy gold."

Investment inflows into gold-backed, exchange-traded funds jumped to an all-time high in the first quarter of this year, boosted by a combination of risk aversion and economic uncertainties, the WGC said this week.

Investors bought a record 469 tonnes in gold ETFs during the quarter, surpassing the previous high of 145 tonnes set in the third quarter of 2008. Total bullion holdings in gold ETFs rose to 1,658 tonnes in the first quarter, WGC said in its quarterly investment report.

"Gold has been one of the few assets that has genuinely provided investors with diversification throughout the financial crisis," said Natalie Dempster, head of investment, North America, for WGC.

Bullion holdings of SPDR Gold Trust, commonly called GLD among traders, was near its all-time high at 1,105.98 tonnes as of 20 April.

GLD, the world's sixth largest gold holder behind the government of Italy, saw its holdings surge 75% in the last 12 months.

Gold ETFs are listed on stock exchanges and offer investors exposure in bullion without taking physical delivery. Sponsors of the funds buy a matching amount of physical gold and keep it in bank vaults.

Average gold price volatility, on a 22-day rolling basis, dropped to 29.2% in the first quarter, down from 44.8% in the fourth quarter of last year.

Volatility in gold prices was still above its long-term average of 13% because of economic uncertainty. However, it remained well below that of the volatile US stock market, measured by the S&P 500 index, at 49% in the same period, WGC said.

WGC said it will release comprehensive first quarter supply and demand statistics in mid-May in its "Gold Demand Trends" report.

Investment in the SPDR Gold Trust fell 1.5 tons to 1,104.45 tons Thursday, according to the company’s Web site, the first drop since 17 April.

Meanwhile, Gold rose to a three-week high this week, its first weekly gain since March, after a report that China has increased its reserves of the precious metal by 76% since 2003.

China has the world’s fifth-biggest holding by country, said Hu Xiaolian, head of the State Administration of Foreign Exchange.

China increased its reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu said in an interview with the Xinhua News Agency Friday. The amount is more than Switzerland’s 1,040 tons, World Gold Council data show, and is worth US$31 billion at current prices.

China's acquisition of bullion reserves is ``a very important signal to the market,'' said  Grubb.

``The other signal to the market is clearly that they have probably sold dollars in order to raise that weighting.''

``It does beg the question for other central banks in Asia as to whether or not they should be so exposed to dollars,'' Grubb said at a conference today in Zurich. ``If you look at reserve-assets holdings around the world, most of the gold is held in North America and in Europe by central banks.

The strength of the US Dollar is "a temporary phenomenon, if you look at the size of the bailout packages in North America the fact that the US economy may well enter a depression....there is a real fear of that,"  Grubb told Reuters in March.
 
"In that scenario I wonder what will happen to the US Dollar," he added.

Such a decline would apply pressure on Gulf Arab states which have faced popular pressure to ditch their currencies link to the greenback and switch to fight imported inflation when the dollar was weak.

"It would certainly be [a concern] to all regions pegged on the dollar....because they have run surpluses, and the Western countries have been in deficits. They have huge accumulation of dollar reserves," said Grubb.

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