Global gold demand shrank to its lowest level since 2009 in the second quarter as China poured funds into equities, which had promised better returns, and imports by India dropped to the lowest in five quarters, an industry report showed on Tuesday.

A plunge in Chinese share prices from mid-June has not helped bullion, GFMS said in a quarterly report, although it was cautiously optimistic that global demand and prices could start to pick up in the final quarter of the year.

China and India are the world's top gold consumers. Physical demand there has not picked up strongly despite a sell-off last week that pushed global prices to their lowest since 2010.

GFMS, a division of Thomson Reuters, said demand for gold bars and coins fell 12 per cent year-on-year in April-June and was around 63 percent below the peak in the second quarter of 2013.

In the largest consuming sector, jewellery, consumption dropped 9 per cent and production declined 6 per cent, GFMS said. Overall physical demand stood at 858 tonnes in the second quarter, down 14.2 per cent from a year before.

"Stock market growth was the story of the first five months in China and this saw substantially lower gold purchases," the report said. "The retreat in June and July did not help gold purchasing, either, as some investors were locked in and others were nervous about asset allocation."

Gold prices have lost more than 7 per cent this year as the dollar strengthened on expectations it would only be a matter of time before the US Federal Reserve raised interest rates.

A deep sell-off from New York to Shanghai last week dragged bullion as low as $1,077 an ounce and investors, worried prices could fall further, have hesitated to buy it back.

Chinese purchases of gold bars and coins fell 26 per cent year-on-year to 35 tonnes in the second quarter, the lowest since 2009, GFMS said. Jewellery buying dropped 23 per cent to 102 tonnes.

While jewellery consumption in India increased 2.5 per cent to 158 tonnes during the period, gross imports fell 10 per cent to the lowest in five quarters, the report said.

China and India consumed almost the same amount of gold in January-June, with China a tad higher at 394 tonnes against India's 392 tonnes, it said.

GFMS forecast gold would average $1,135 an ounce in the third quarter against $1,192 in April-June, before recovering to $1,175 in the last quarter of the year.

"It remains our view that a US rate hike this year is already priced into the market and that an increase could well prompt a review of asset allocations that leads to an increase in gold holdings," the report said.

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