Chinese demand for gold isn't letting up following a strong first quarter that saw demand reach record levels from Asia's biggest economy, offsetting weakening appetite in India.

'It does seem that China is picking up the slack in the system from a weaker India,' said Ross Norman, chief executive of London-based bullion broker Sharps Pixley.

Chinese imports of the yellow metal from Hong Kong were 65% higher in April than the month before, the third monthly increase in a row according to data compiled by Commerzbank, citing the Census and Statistics Department of Hong Kong.

A research note by the German bank says the Hong Kong statistics are important because they offer a clue into China buying since the country doesn't release overall gold import figures. By the end of April, China had this year already imported more than half of last year's total gold import volume, says Commerzbank.

Chinese demand remains strong given that gold is bought by an increasingly affluent middle class as an investment and because the yuan remains robust against the U.S. dollar, which the metal is denominated in, making it cheaper for Chinese buyers.

'Inflation [in China] is high and there is a low chance to invest in property and little desire to participate in the stock market. But disposable income is rising and people want to protect their wealth,' said Helen Lau, a senior metals and mining analyst at securities firm UOB Kay Hian.

In contrast, demand in India, which was traditionally the world's biggest buyer of gold, is weakening. Indian demand has suffered from the government's introduction of an unpopular tax on gold that was subsequently removed and a persistent weakness in the rupee as the economy slows.

The poor performance of the rupee means that gold appears extremely expensive to an Indian consumer. It is trading near all-time highs in India, at around 30,000 rupees ($536) per 10 grams.

Morgan Stanley's most recent India Gold Survey shows that demand for gold in the country is divided equally among individual consumption, investment and spending on events like weddings and religious festivals.

There's also a continued interest in gold as an investment because from a rupee perspective, gold has been the best-performing asset over the last 10 years.

Expected gains in gold and low volatility are the main drivers of Indian investment demand, more so than inflation, so the high price is not necessarily a deterrent.

'If the gold value starts to fall off in rupee terms, that could affect the return perception, which could have an effect on demand,' said Ridham Desai, Morgan Stanley's India head of research.

Indians will continue paying more money for less gold, Morgan Stanley predicts: The bank forecasts demand in volume will fall by 4% in 2012, while rising by 4% in value.

Daniel Inman