The high price pulled down gold investment in the second quarter by 37 per cent to 359.4 tonnes year-on-year from 574.2 tonnes in the second quarter in 2010, WGC said in the report.

Market experts, however, warn of further increases. "Gold had spiked by over 26 per cent in this year and most of this rise has been in the third quarter. Thus it is quite possible that gold volumes will show a significant drop in the third quarter and if prices refuse to cool down, demand drop could be drastic as we approach the year end," Pradeep Unni, senior commodity analyst at Richcomm Global Services, told Gulf News.

He added that investing in gold through futures and options provides "high leverage" and helps take advantage of the short-term and medium-term price movement.

However, the higher price of gold did not hurt demand in two countries - India and China, which experienced demand growth of 38 per cent and 25 per cent respectively during the second quarter over the corresponding period of 2010.

The two "standout" markets emerged as major contributors to growth in both jewellery and investment demand. They accounted for 52 per cent of total bar and coin investment and 55 per cent of global jewellery demand in the second quarter, according to the WGC.

"This growth is likely to continue, due to increasing levels of economic prosperity, high levels of inflation and forthcoming key gold purchasing festivals," the council stated in the report.

David Fuller's view Investment is the big driver behind gold's advance, in my opinion. Higher prices will inevitably erode industrial demand for gold, while also making gold jewellery less affordable. High prices will also attract more scrap as poorer people cash in their gold.

In 4Q 1979, I remember reading reports that "Indian peasants" were selling their gold. The crowd paid little attention because two sisters from Costa Rica had produced a chart extrapolation suggesting that gold would rise to $4,000. That proved costly for many people but the actions of "peasants" in a culture which had traded gold for centuries proved to be a very important early warning.

India is a lot richer today, as is China, and this is reflected by this year's increase in demand for gold from these two countries. However, we should remain on the alert for eventual evidence that the demand trend for gold in India is reversing. That could be a lead indicator, suggesting that risks were increasing.