Despite a sharp drop in jewelry demand and record mine production, global gold demand and prices hit record highs in the second quarter, the World Gold Council said in its latest survey of demand trends for the precious metal.

Global demand for the precious metal rose 4% year-on-year to its highest second quarter on record, and the London Bullion Market Association gold price jumped 18% year-on-year to a record quarterly average $2,338 per ounce, the industry group said.

Gold mining companies took advantage of the record gold price by increasing production by 3% year-on-year, the council said.

"Mine production is still poised to surpass its previous high as the output from several regions – led by Africa – benefits from ramp-ups and expansions, as well as higher grades," the council said.

The high price discouraged jewelry buyers, with second quarter jewelry consumption volumes declining 19% year-on-year to a four-year low of 391 metric tons.

"Q2 saw price sensitivity bite into jewelry demand and it may be a while before consumers fully adjust to higher prices," the industry group said.

Despite the downturn in jewelry demand, a 53% increase in over the counter and other investment pushed total demand into positive territory. Over-the-counter transactions involve a network of participants who trade directly with each other without the oversight of a formal exchange.

"Estimating and attributing this investment buying is difficult due to its opaque nature, but field research strongly supports the data available that puts this at 329t – the strongest quarter since Q4'20," the council said. "Demand from this sector has been in response to concern over the U.S. debt burden, geopolitical risks and attraction to the strong price rise."

Meanwhile, central bank buying rose 6% year-on-year to hit 184 metric tons. That marked a slowdown from a record-breaking start to the year.

But this is still a very healthy level of buying, 3% above the five-year quarterly average of 179t," the council said. "Combined with Q1 net purchases, central bank gold demand in H1 totaled 483t, the highest first half year in our data series."

Buying from physically backed gold exchange-traded funds pared their declines, with their holdings dropping by seven metric tons in the second quarter compared to a 21-metric ton drop in the same quarter last year.

"The pace of outflows from gold ETFs slowed sharply in Q2," the council said. "A continuation of the nascent positive trajectory of gold ETFs, along with further strength in futures positioning, is still likely in our view given a number of catalysts."

Those catalysts are:

• A clearer path to lower policy rates in the United States and Europe

• A large current and forecast U.S. fiscal deficit

• Increased market volatility, with U.S. elections in the second half of the year

• Global geopolitical risk that curtails some recycling and bolsters retail demand

• Support from the trend of central bank buying.