Continuing uncertainty over how to deal with inflation and ongoing developed-country debt worries led certain emerging-market central banks to boost their gold holdings in the second quarter, says the World Gold Council (WGC). Exchange-traded funds and other investment products have also seen significant net inflows.

The Banco de Mexico acquired 100 tonnes of gold between January and April, raising holdings of gold from 6 tonnes to 106 tonnes and raising its gold allocation from under 1% to 4%. The Bank of Thailand also increased its gold holdings in March by 9.3 tonnes, following the 15.6 tonnes it acquired in summer 2010. Russia’s central bank has also bought 41.8 tonnes since the start of 2010.

Such moves helped push up the price of the precious metal yet further from previous record highs. The average price during the second quarter, at $1,506.13 an ounce, was 8.6% higher than that of the first quarter and 21% up on Q2 2010. The WGC notes in its second-quarter 2011 report that even as prices for most commodities dropped sharply in May, gold remained relatively stable.

Meanwhile, European central banks have remained almost entirely inactive, with only one tonne of gold sold to date in the past couple of years. That said, they are among the biggest holders of gold in absolute terms and in terms of the proportion of their reserves allocated to the metal.

Five of the top 10 holders of gold by asset size are European countries, and their holdings as a proportion of total reserves tend to be significantly higher than those of, say, Asian countries. The official IFS gold holdings in Germany, Italy and France – the three biggest European holders of gold – as a proportion of reserves are 71.4%, 71.7% and 66.1%, respectively. Compare that to figures for China, India and Japan of 1.6%, 3.3% and 8.7%; they are the three biggest holders of gold in Asia by assets.

In addition to central banks' direct gold purchases, there has been substantial activity among other investors via other channels.

Gold-backed exchange-traded funds (ETFs) monitored by the WGC had strong net inflows during Q2. By the end of the quarter, ETFs had added 45.6 tonnes (2.2%) – the biggest rise since Q2 last year – bringing their collective holdings to 2,155.3 tonnes worth $104.3 billion.

The largest investment was into European ETFs, which saw net inflows of 29.2 tonnes. “Increasing concerns over the stability of the European periphery and the contagion from a potential default by Greece stimulated demand for gold ETFs,” says the WGC report.

SPDR Gold Shares – listed on the NYSE and cross-listed in Hong Kong, Mexico, Singapore and Tokyo – saw a small outflow of 3 tonnes. But it remains by far the biggest gold ETF by assets, with $58.5 billion in AUM and 56.1% of the market as monitored by the WGC – the next biggest is ZKB Gold Trust, with 9.1% of the market.

Anecdotal evidence suggests European investors are also accessing gold through over-the-counter markets, notes the WGC, and in the US some of the major banks are offering alternative ways for investors to get exposure to the market.

Meanwhile, the high inflationary environment in India has led to a surge in the launch of gold-backed savings and investment vehicles, adds the Council. These include gold mutual funds that invest solely in gold ETFs, hybrid funds that invest in physical gold and equities, and other specialised products geared towards wealthier individuals.

Investment activity in China also remained high in the second quarter. Anecdotal evidence suggests continuing strong demand for retail investment products and robust gold savings in vehicles such as the gold accumulation plan jointly launched by ICBC and the WGC in December.