(Corrects typo in headline)
--Clyde Russell is a Reuters columnist. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Aug 15 (Reuters) - Gold bulls are the financial market equivalent of the apocalypse-fearing survivalists portrayed in the popular television show "Doomsday Preppers".
They buy the yellow metal because of concern that monetary authorities, mainly in the developed world, will lose control of inflation and their currencies' value through keeping low interest rates and quantitative easing too long.
If the gold bugs are proven right, they will prosper while investors in equities and other assets suffer from rampant inflation and severe economic recession.
Perhaps a kinder way of looking at gold investment is to say it makes sense as long as real interest rates remain negative, as is currently the case in much of the Western world.
This would perhaps explain the thinking behind hedge fund Paulson & Co maintaining a stake worth about $1.31 billion in the world's largest gold exchange-traded fund (ETF), the SPDR Gold Trust.
With spot gold up 8.9 percent this year to Thursday's close of $1,312 an ounce, perhaps long-time gold bull John Paulson's bet isn't looking that bad, until it's pointed out that gold is still some 32 percent below its September 2011 record.
Buying gold on the basis of negative real interest rates is also largely a Western construct, and ignores that the physical gold market is now dominated by China and India.
And it's here that problems emerge for the bullish gold story, with the latest World Gold Council report showing dramatic declines in demand in the two countries that account for almost half the market.
China's gold demand fell 52 percent to 192.5 tonnes in the second quarter of 2014 from the same period last year, while India's slumped 39 percent to 204.1 tonnes.
The council, which represents gold producers, pointed out that the second quarter of 2013 had been a strong period, but even so, there is little doubt that demand in India and China is falling, and quite sharply.
Switching to comparing the year ended June 2014 with the year to June 2013 shows Indian demand down 28 percent and Chinese by 12 percent to a near four-year low.
It may well be the case that demand in India is being held back by government restrictions such as high import taxes and the requirement to re-export 20 percent of imports as jewellery, but this doesn't alter the fact that Indian consumption is sharply lower.
This removes a pillar of support for physical gold demand, meaning that for prices to rally in a sustained way, other buying must fill the gap.
Central bank purchases have remained solid, with the 117.8 tonnes in the second quarter up 28 percent from the same quarter last year, but down from the 124.3 tonnes recorded in the first three months of 2014.
Technology demand is also largely steady, but jewellery consumption fell to 509.6 tonnes in the second quarter, down 30 percent from the same period in 2013 and 12 percent from the first quarter.
Flows into ETFs were still negative, with a net 39.9 tonnes being sold in the second quarter, up from 2.6 tonnes in the first, but significantly lower than the massive 402.2-tonne outflow in the second quarter of 2013.
At best it seems that investment outflows have stabilised at lower levels, but the point is that the overall market is still selling gold in ETFs, putting them at odds with Paulson's position.
While gold does benefit from negative real interest rates and the recent steady diet of geopolitical problems, investors are also probably wary of increasing signs that the United States is ready to start raising interest rates.
This should boost the value of the U.S. dollar as well as narrowing gold's appeal.
In the run-up to the 2011 all-time high, gold was supported by the three pillars of investment buying on fears on a Western monetary meltdown, physical demand from China and India, and central bank buying in the developing world.
Currently, none of these three is making much of a contribution, suggesting gold's scope to rally is limited.
Editing by Joseph Radford