The outlook for gold looks promising in 2010, according to the World Gold Council and will be underpinned by investment demand.

This confident forecast came from the WGC, despite an 11% fall in demand for the metal in 2009, owing to weaker industrial and jewellery demand.

For that we can blame the recession, the lingering impact of the credit crunch and the soaring price of the metal which charged back through $US1000 an ounce around last September and went on to top $US1200 an ounce.

"Regardless of whether the economic recovery gathers momentum or stumbles in 2010, we believe that western investment demand will remain well underpinned," the WGC said.

"If the global economy falters, then western investors will continue to look towards gold for its diversification and portfolio-insurance properties.

"Conversely, if the economic recovery becomes more firmly entrenched, then inflation concerns are likely to continue to gain prominence."

In fact gold so far in 2010 has been strong, as the US dollar has been strong.

Along with oil, it has risen in the past couple of weeks, as the US dollar has hit 9 month highs against the faltering euro.

Usually it's been the greenback that has helped underpin gold in the past year or so.

Gold hit a record level of $US1,226.56 dollars an ounce on December 3, 2009, but has since dropped, trading close to $US1,005 this week.

Much of that was driven in December and early last month by the appreciation of the US currency.

But worries about sovereign debt, especially Greece, has helped support the price.

Those looking for inflation to be a driver this year had better look again.

US consumer price fell last month, Japan is experiencing deflation, the UK saw a surge in prices, but that was because of the restoration of the VAT cut from last year and weaker sterling.

UK prices are expected to weaken this year under the weight of sluggish demand, which will outweigh any impact from the country's huge debt burden and borrowings.

Economists say the same will likely happen in the US.

Inflation is rising in India, a major consumer of the metal up till China's emergence a couple of years ago.

Chinese inflation seems under control, for now.

China cemented its position as the world's leading gold miner and it was the only major jewellery market to record annual growth in tonnage.

The WGC said "In 2009, dollar demand for gold remained above the $US100 billion mark for the second year in succession against the backdrop of continued turbulence in financial and commodity markets.

"This resilience in demand was achieved in the context of average gold prices 12% higher than those in 2008, at $US972.35/oz."

The council said the volume of total identifiable gold demand fell 11% last year, from the previous year to stand at 3,385.8 tonnes.

"In $US value terms, the two years were broadly on par.

"Tonnage demand in Q4 of 2009 was down 24% on Q4 2008, equivalent to a 5% rise in $US value terms.

"If we add the less visible side of investment, total tonnage demand in 2009 enjoyed an 11% rise over 2008 levels.

"The $US gold price in 2009, at an average of $972.35/oz, was up 12% on $871.96 in 2008.

"In Q4, the gold price averaged $1,099.63, up a very strong 38% on the levels of Q4 2008.

"Consumers in India and Turkey experienced slightly smaller increases of 32% and 34% respectively, while consumers in the Euro area experienced a considerably smaller 23% rise.

"Identifiable investment in 2009 was up 7% relative to 2008, the only sector on the demand side to record positive growth.

"Industrial and dental and jewellery demand recorded declines of 16% and 20% respectively across the year."

The council said that comparing Q4 2009 demand against Q4 2008 shows that the only sector to enjoy positive growth was industrial and dental demand (11%), albeit off a low base.

Jewellery demand fell 8%, also off a low base, while identifiable investment declined 50% relative to an exceptionally strong Q4 2008.

"Q1 2009 was also exceptionally strong; although investment flows subsequently tapered significantly, they remained high in absolute terms.

"After a very weak Q1, jewellery and industrial demand enjoyed three consecutive quarter-on-quarter gains.

"By Q4, jewellery demand had risen to 500.4 tonnes, up from 336.3 tonnes in Q1.

"The recovery in jewellery demand was driven largely by a rebound in the Indian market. Industrial demand benefited from a strengthening in the electronics sector, reflecting improved economic conditions," the council said.

The council said that strong investment flows in western markets generally offset weakness in non-western markets during 2009.

While China was the only non-western country to record positive growth in net retail investment during 2009, India was the largest contributor on the downside, influenced strongly by dishoarding in the first quarter, although this was followed by a subsequent rebound.

"The strongest quarter-on-quarter performance came from the US, rising 104%.

"Bar hoarding, which largely covers the non-western markets, experienced a significant decline in both annual terms and in Q4 relative to Q4 2008," the council said,

The WGC said the demand from Exchange Traded Funds, at 594.7 tonnes, was 85% higher than in 2008, but petered out as the year went on.

There are signs now of some recovery in demand, but nowhere near the levels of a year ago.

The WGC said the strong 2009 result for ETFs "was driven by an exceptional first quarter, which soared to 465.1 tonnes. Demand in Q4 2009 was significantly lower than in either Q4 2008 or Q1 2009, but still healthy in absolute terms at 31.6 tonnes".

Overall, gold supply in 2009 was up 11% on the levels of 2008.

According to the WGC the single largest contributor was recycling activity, with mine production and de-hedging also making a sizeable positive contribution.

"These positive influences were partly offset by a significant reduction in net official sector sales, which totalled just 44 tonnes in 2009 compared with an average of 444 tonnes over the five years to 2008.

"The annual increase in gold supply in 2009 was centred on Q1.

"A sharp fall in recycling activity and net buying in the official sector led to a significant reduction in supply in Q2, while higher levels of producer de-hedging had the primary dampening effect on supply in Q3.

"In the 4th quarter of last year, gold supply, at 898 tonnes, the supply of gold was 8% up on the previous quarter, but 8% below Q4 2008 levels.

"A 6% increase in annual mine production over 2008 (2,554 tonnes against 2,409 tonnes) reflected a number of new projects coming on stream during the year, notably Barrick’s Buzwagi mine in Tanzania, and Mineral Deposits’ Sabodala mine in Senegal.

"Improvements in production at existing mines such as Grasberg (where 2008 production had been particularly weak) further reinforced the year-on-year rise.

"Q4 2009 mine production grew by 2% relative to Q4 2008, from 646 tonnes to 657 tonnes.

"Modest growth in Indonesia (notably at the Grasberg mine), Australia (Newmont’s Boddington project announced commercial production in November), Tanzania (Buzwagi) and China were tempered by an ongoing decline in South Africa and a fall in US production (with Barrick’s Goldstrike operation undertaking stripping activity during the quarter).

"Recycled gold, the key element of year-on-year growth in 2009 annual supply, spiked to a record level of 584 tonnes in the first quarter as the gold price in many countries hit record highs.

"Despite falling back quite sharply in Q2, recycling supply remained high on a historical basis, before returning to more ‘normal’ levels in the second half of the year.

"The strong rise in the gold price during the fourth quarter encouraged another quarter-on-quarter surge in recycling, but a comparison with Q4 2008 reveals a very modest 3% increase, despite a 38% rise in the average gold price over the same period.

"The Middle East was the biggest contributor to the Q4 increase in recycling activity, with consumers preferring to sell their existing holdings of gold at the prevailing higher prices. There was also some selling back of gold jewellery by retailers seeking to raise cash.

"The supply of recycled gold in western markets was also considerably higher, although it continued to account for only a modest proportion of the total global supply of recycled gold," the WGC said.