London (Platts)--16Feb2012/145 am EST/645 GMT

Global demand for gold in 2011 rose to 4,067 mt, worth an estimated $205.5 billion -- the highest dollar value on record and the largest tonnage level since 1997, according to the World Gold Council's Gold Demand Trends report released Thursday.

The main driver for the increase was the investment sector where annual demand was 1,640.7 mt, up 5% on the previous record set in 2010, and with a value of $82.9 billion. The pre-eminent markets for investment demand in 2011 were India, China and Europe.

"Overall it was an impressive year," WGC's managing director of investment, Marcus Grubb, told Platts via telephone. "It's largely an investment, central bank [buying] and China/India story," he said.

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China and India remained the cultural heartlands of gold, generating 55% of global jewelry demand and 49% of global demand in 2011.

According to the report, India remained the largest country for demand, at 933.4 mt, notable considering the volatility of the gold price and the weakness of the Indian rupee against the US dollar during the second half of the year.

In China, annual demand of 769.8 mt was up 20% year on year as a result of increases in both jewelry and investment. The largest rise was in investment, where demand of 258.9 mt was up 69% year on year.

China jewelry demand increased every quarter of last year and the country was the largest single jewelry market worldwide for the second half of 2011, WGC said in the report.

CHINESE DEMAND COULD 'ECLIPSE' INDIAN DEMAND IN 2012

Said Grubb: "Looking particularly at Asia, there was a major boost to the overall figures from the increase in Chinese demand, which is a trend that we see continuing over the next year. It is likely that China will emerge as the largest gold market in the world for the first time in 2012.

"What is certain is that the long-term fundamentals for gold remain strong, with a diverse and growing demand base, coupled with constrained supply side activity."

He added: "The big story was the coin and bar market. The market has changed, China is storming up from the inside. 2012 could be the first year that Chinese demand eclipses Indian."

Demand for gold bars and coins continued to be robust and was another major contributor of the increase in investment demand, climbing 24% to 1,486.7 mt.

There was also a surge in demand in Europe, with the region posting its seventh consecutive annual gain to 374.8 mt. Germany and Switzerland were the main drivers of growth in the region as the eurozone remains in turmoil and the need for asset protection continues to be a priority, according to the report. CENTRAL BANK BUYING LIKELY TO CONTINUE IN 2012

Central banks continued the trend established in 2010 of being net buyers of gold. Purchases by central banks soared from 77 mt in 2010 to 439.7 mt last year. This reflected the need to diversify assets, reduce reliance on one or two foreign currencies, rebalance reserves and ultimately protect national wealth, according to the report.

"Central bank buying is likely to continue in a similar fashion in 2012, with banks heading back to more historical weightings," said Grubb. He added that there was little evidence to suggest that European central banks were selling gold holdings to cover debt obligations. On the supply side, gold mine production reached a new annual record of 2,809.5 mt, up 4% from 2010. Recycling was down 2% year on year to 1,611.9 mt in 2011, "which when average price rises of 28% are taken into account, indicates that near-market supplies are drying up and that consumers may be holding on to their gold in the expectation of higher prices," the WGC said.

--Ben Kilbey, ben_kilbey@platts.com

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