China is set to overtake India this year as the world’s largest consumer of gold, the World Gold Council predicted, underscoring the surge in Chinese demand that has revolutionised the bullion market.

India has for decades been the world’s largest gold market, but in the final quarter of 2011 demand tumbled by almost half from a year earlier as a collapse in the value of ruppemade gold more expensive for Indian buyers.

     “It is likely that China will emerge as the largest gold market in the world for the first time in 2012,” said Marcus Grubb, managing director for investment at the WGC, a lobby group for the gold mining industry.

       Thursday’s prediction comes after a surge in Chinese gold demand last year, with imports from Hong Kong– a proxy for overall import demand – more than tripling from 2010. In the second half of the year, as Indian demand waned, China edged ahead as the world’s top consumer, according to data from GFMS, the consultancy, that were published by the WGC on Thursday.

       China has become an increasingly important driver of the gold price, with large purchases propping up prices late last year as western investors were selling.

       On Wednesday night, gold was trading at $1,726 a troy ounce, up 13.5 per cent from a late December low but still 10 per cent below the nominal record high of $1,920 set in September. Paulson&Co, one of the largest hedge fund investors in gold, revealed in a regulatory filing this week that it had sold 45 per cent of its holdings of gold exchange-traded funds in the second half of the year.

      Mr Grubb predicted that Chinese consumption would rise this year at pace similar to the 20 per cent increase in 2011. That implies jewellery and investment demand of about 925 tonnes in 2012. On the other hand, he said Indian demand could fall from its level of 933 tonnes in 2011.

    “The dynamic in those two economies is radically different,” he said. “There might be more challenges to the Indian market [than the Chinese market] in the next 12 months.”

      Indian economic growth has slowed, with the government recently cutting its forecast for growth in this fiscal year ending in March to 7 per cent, having steadily pared back previous projections of nearly 9 per cent.

    “You’ve effectively seen foreign direct investment dry up in India,” Mr Grubb said. “That feeds down into the economy with slowing growth and less liquidity available. That really impacts the rupee, and gold looks horribly expensive to local consumers.”

      In China, on the other hand, Mr Grubb predicted further strength as both growth and inflation remain relatively high, driving local consumers to invest in bullion to protect their wealth. Savers have poured their money into gold because of the lack of alternative investment options in China, were bank deposits carry negative real interest rates and property prices have been sliding.

       Chinese gold consumption has already risen by 140 per cent between 2007 and 2011, as growing wealth and the liberalisation of the domestic gold market drive a surge in consumption. Beijing has encouraged gold consumption, announcing in August 2010 measures to promote and regulate the local gold market, including expanding the number of banks allowed to import bullion.

       Elsewhere last year, demand for gold in Europe surged as investors fretted about the worsening eurozone debt crisis. European investment in coins and bars rose 26 per cent to 375 tonnes, the WGC said, making the region the largest market for physical gold investment products.