The weakest performance was seen in Egypt, where demand dropped by 43 percent to 8.8 tons, as the market continued to feel the effects of the Arab Spring through a decline in tourism, foreign investment and disposable income, the World Gold Council (WGC) said in its Gold Demand Trends Third Quarter 2011 report released on Thursday.

The demand declined between 20-24 percent in Saudi Arabia, the UAE and other Gulf states. Demand of 11 tons in the UAE (-24 percent year-on-year) echoed the decline in India as expatriates from the Indian Subcontinent reduced their demand for 22-carat jewelry in response to the volatile price action.

However, the WGC said third quarter gold demand increased 6 percent to 1,053.9 tons, worth a record $57.7 billion. A strong rise in investment demand drove the growth in overall demand, as investors across the globe sought wealth preservation, portfolio diversification and strong returns. Jewelry demand contracted in the face of record gold prices and challenging economic conditions, while the technology sector contributed a steady level of demand.

While the global gold jewelry market contracted by 10 percent in Q3 at 465.6 tons, demand was only 5 percent below the quarterly average since Q4, 2008 of 490 tons. Moreover, jewelry demand in value terms was 24 percent higher year-on-year, at a record $25.5 billion. The rolling four quarter total for jewelry tonnage reached 2,018.2 tons, 2 percent above the four quarter period ended Q3, 2010.

A snapshot from the start of each decade since 1970 reveals that gold market fundamentals have experienced dramatic change.

The WGC examined the shifting market dynamics over this time. Investment demand was the engine of growth in overall gold demand during the third quarter. Price volatility, combined with record high prices, discouraged gold jewelry demand, but gold demand from the technology sector was extremely resilient.

The geographical shift of gold demand since 1970 has been quite remarkable. A look at the first year of each of the five decades since the price peg was removed shows how dramatic the shift from North America and Europe to the Indian Subcontinent and East Asia has been. North America and Europe had a combined share of 47 percent of the global market in 1970, growing to 68 percent by 1980. This fell to 38 percent, 28 percent and 27 percent respectively in 1990, 2000 and 2010. The drop in global share was compensated for by the Indian Subcontinent and East Asia, rising from 35 percent in 1970 to 58 percent by 2010.

The report said gold price surged throughout July and August, reaching a record $1,895 an ounce on the London PM fix on Sept. 5-6, and even higher levels on intra-day trading. Gold then staged a fairly deep correction from this level, before stabilizing during the closing days of the quarter and subsequently establishing a base around $1,600-1,650 an ounce. Despite this sharp pullback, gold still outperformed most other assets, generating solid returns on both a quarterly and year-to-date basis. By the end of September, gold had delivered gains of 8 percent over the quarter and 15 percent over the year-to-date. The quarterly average price of $1,702.12 was 39 percent above the Q3, 2010 average of $1,226.75 and 13 percent above the second quarter average.

Western investors were attracted to gold's insurance-like properties, given the worrying developments in euro zone, the WGC said in its report. Meanwhile, investors in Eastern markets focused on positive price expectations for gold as well as its inflation-hedging properties.

In fact, net buying accelerated notably during the quarter totaling 148.4 tons, as the issues surrounding the creditworthiness of Western governments' debt seeped into the official sector.

Gold investment demand (all demand for gold bars and coins and ETFs and similar products) reached 468.1 tons in the third quarter, a year-on-year gain of 33 percent. This generates a record quarterly demand value of $25.6 billion, almost double the $13.9 billion witnessed in Q3, 2010.