Volatile prices affected the market for coins and bars in the second quarter of 2006, the Council said. The impact of price movements varied between countries and between investment products.

A substantial amount of selling back of bars occurred most notably in Japan. In contrast, the market for new coins, notably in Turkey, was more buoyant and the U.S. was also strong.

Demand for official coins increased 64% on the same period last year. Solid growth was also seen in medallions and imitation coins, a market concentrated in the Middle East and India, the Council said.

JEWELRY DEMAND

Price movements during the quarter were exceptionally volatile, having a demonstrable impact on jewelry demand in tonnage terms, while positive consumer sentiment toward gold jewelry drove demand in value terms to record levels, the Council said.

Price volatility affected the gold jewelry market in different ways.

‘‘The most obvious was the reaction of jewelry buyers in markets in much of Asia (notably India) and the Middle East,’’ the Council said. ‘‘When prices moved rapidly, consumers tended to hold back from purchasing.’’

In the second quarter of 2006, this resulted in a drop in overall jewelry demand by 24% to 562 metric tons compared to a year earlier.

All markets showed a fall in volume terms compared to the very strong second quarter 2005, though the extent of the decline varied markedly, noted the Council.

Demand in China was less affected than in other markets, falling just 2%, since price volatility is less of a deterrent to purchase and local market sentiment continues to expect further price growth.

In Vietnam and Turkey demand fell 1% and 3% respectively, while India - traditionally the market most sensitive to price volatility - was most severely affected, declining 43% when compared with an exceptionally strong second quarter of 2005.

Saudi Arabia also reported a significant decline (32%), compounded by a stock market slump in March which had a serious impact on wealth and consumer spending.

All gold jewelry markets were affected at the trade level, the Council said, as manufacturers and retailers strove to reduce exposure to risk brought about by periods of price volatility.

‘‘In the second quarter of 2006, this resulted in substantial de-stocking,’’ the Council said.

SUPPLY

Despite an increase in the supply of scrap, overall gold supply was constrained in the second quarter of 2006 as a result of lower central bank sales and substantial de-hedging by gold mining companies, the Council reported.

Scrap supply increased 57% in tonnage terms on the same period in 2005, largely due to price volatility.

Official sector sales declined in the second quarter, decreasing 63% year on year in tonnage terms.

Sales under the Central Bank Gold Agreement have been much lower than expected in the current CBGA year, which ends on Sept. 26, raising the possibility that sales may fall short of the 500 metric ton limit.

The 500 metric ton annual allowance is a limit under the terms of CBGA2, and any shortfall of this limit cannot therefore be made up in future years, the Council said.

Mine production remained broadly stable during the period, rising 2% year on the year in tonnage terms.

OUTLOOK FOR 2006

The political and economic climate remains favorable for gold investment for the remainder of the year, the Council said, as the fundamentals of the market are perceived as strong and the diversification benefits of gold are being increasingly recognized.