A surge in Western gold investment helped offset sliding Asian demand in the second quarter, GFMS analysts at Thomson Reuters said on Tuesday, as they hiked their gold price forecast for the year in response to jitters over the economic outlook.

In the Q2 update of its Gold Survey 2016, GFMS said it now expects gold to average $1,279 an ounce this year, up from $1,184 previously. That reflects concern over the economic and political landscape, as well as a 24 percent surge in gold prices in the year to date.

"The revision is a mark to market of the impressive gains that gold has posted so far this year, and reflecting the changed sentiment stemming from increased uncertainty from economic and political outlooks," it said.

"These include Brexit, reduced expectations of a rate rise from the Fed, a wobbly Italian banking sector and the U.S. Presidential race."

These concerns translated into rising investment demand for gold in the second quarter.

The surplus in the gold market contracted in that period as surging inflows into bullion-backed exchange-traded funds balanced sliding demand from Chinese and Indian buyers.

Physical gold demand hit a seven-year low in the second quarter, GFMS said, falling by more than a fifth for a second quarter in a row, as economic pressures, the sharp rise in prices and uncertainty over their direction hurt Asian offtake.

ETF inflows meanwhile reached their highest half-yearly total ever in the first six months of the year at 568 tonnes.

"The second quarter of 2016 bore striking similarities to the previous three months, with Chinese demand being lackluster and Indian offtake nothing short of abysmal," GFMS said.

"Meanwhile, demand from investors in Western markets was very strong, especially by exchange-traded funds for the second consecutive quarter, as they reassessed the prospects for asset allocation and put gold in a more positive light."

Indian jewelry demand fell 56 percent year on year to 69 tonnes in the second quarter, while net investment was 40 percent lower.

In China, jewelry demand plunged 31 percent, while retail investment was down 12 percent. Central bank buying nearly halved on a net basis, as Venezuela divested gold and Russian buying contracted.

On the supply side of the market, mine output eased by 2 percent, but overall supply increased by 6.2 percent due to a jump in recycling.