Demand for gold grew 9% year-on-year in 2010, driven by the jewellery buying of Indian and Chinese customers, but also lifted by the fact that the world’s central banks became buyers for the first time in over two decades.

Demand last year hit 3,812 tonnes, above the 2008 peak, despite the fact that gold prices have increased 40% between 2008 and 2010. In value terms the demand for gold was $150 billion, up 38% year-on-year.

Demand for gold jewellery has shown remarkable inelasticity in the face of increasing prices. Between 2009 and 2010 gold prices gained 26%. However, demand still grew by 17%.

In India, the demand for gold jewellery was up 69% over the previous year to 746 tonnes. Demand in China also set a new record, albeit at a lower overall demand of 400 tonnes. India and China together accounted for 51% of the global demand for jewellery, bars and coins last year.

In rupee terms, demand for jewellery in India more than doubled in 2010 to Rs1.342 trillion ($29.6 billion) from Rs669 billion in 2009. This was due to the combined impact of a 20% increase in the rupee price of gold and the overall increase in demand.

Investment demand, which refers to the demand for bars and coins as well as exchange-traded funds (ETFs) and similar financial products, fell marginally by 2% in 2010 over 2009.

But the two categories performed quite differently on a disaggregated basis with demand for bars and coins gaining 56% during the year. Demand for ETFs lost 45% over the previous year, but still stood at 338 tonnes, making last year the second-highest year for ETFs.

China was the second-largest market for investment demand and registered the highest growth. Total demand in China last year stood at 180 tonnes of bars and coins sold, representing an increase of 70% over the previous year, and surpassing demand in both the US and Germany.

The Chinese demand was driven by domestic inflation pressure, coupled with the poor returns provided by alternative investment avenues such as bank deposits and equity markets.

Across the rest of Asia, demand for gold jewellery softened during 2010, as consumers were deterred by rising gold prices.

In Vietnam, demand was down only 5% over 2009, but markets in Indonesia, Japan, Thailand and South Korea registered double-digit year-on-year declines and customers in all four countries shifted to lower-carat gold and/or branded silver jewellery.

But investment demand continued to grow across Asia. In Thailand, investment demand grew to 51 tonnes in 2010, where as in 2009 Thailand was a net seller to the tune of 10 tonnes in the investment market. Investment demand also grew in Vietnam, South Korea and Indonesia.

Between 1998 and 2009 central banks sold gold every year. Until 2007 the rate of sale averaged 400 to 500 tonnes annually. This dropped by 50% in 2008 and fell further to just 30 tonnes in 2009. Last year central banks became buyers of gold.

Central banks in emerging markets have been buying gold to diversify their external reserves. Last year Russia was the largest buyer, with net purchases of 135 tonnes. China was also a buyer although it is difficult to estimate how much China bought since many of its purchases were made from local mines. Among the Asian countries, Thailand, Bangladesh and the Philippines all purchased gold.

The findings were released by the World Gold Council yesterday. The WGC remains bullish on gold demand, across all end-uses, in the coming quarter.