Surging gold prices push Indians to rein in, recycle

“We need to think whether to buy gold or not because
nearly 30,000 rupees for 10 grams is too much,” Bora said in a jeweller’s
shop in Zaveri Bazaar in Mumbai, one of the world’s biggest gold markets.
Thirty-thousand rupees is $580.

Indians are usually the biggest buyers of gold in the world
and from October to December, the calendar is full of festivals and weddings,
creating many opportunities for people to flaunt their finery.

But international prices of spot gold have risen 21 percent
on the year, their 11th straight year of rises, and a weakening rupee is also
increasing domestic prices.

The higher prices have taken some of the sheen off Indians’
age-old fascination with gold as an investment against inflation – currently
near double-digits – particularly as a lot of cash is tied up in laggard
equities and real estate markets.

Things are looking dull for jewellers, with demand yet to
pick up from a fall last quarter, and gold peaking at 29,212 rupees for 10
grams on Nov 15. Gold hit a record around $1,920 per ounce on global markets in
September.

“This sudden rise [in gold prices] has made people wait
for some time to buy,” said Kumar Jain, vice-president of the Mumbai
Jewellers’ Association, adding that his gold business has dropped some 40
percent in volume since the start of the year.

Now expectations are growing for prices to slip towards
27,000 rupees around the end of the year, spurring those who can to delay
purchases and those who have hoarded gold to cash in.

“Imports [of gold] will be down 20 to 25 percent in the
last (December) quarter and it will have a negative impact on global
prices,” said Prithviraj Kothari, president of key trade body the Bombay
Bullion Association, which has about 400 members.

Market analyst Clyde Russell expects that there should be
interest for gold as a hedge, as long as inflation in India remains high, but
that demand could be affected by further gains in global prices.

A poll of industry players expect exactly that – predicting
prices could hit as much as 31,500 rupees by the end of June next year.

In a report this month, the World Gold Council (WGC) said
Indian jewellery demand slid 26 percent in the third quarter, while total
imports were down 20 percent.

The WGC expects demand to pick up in the last three months
of 2011, pushing imports to a record of more than 1,000 tonnes, but in the
narrow streets and family-run market shops of Zaveri Bazaar there was little to
support that optimism.

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“Diwali festival buying was slow and winter buying for
weddings has also been slow,” said Gargi Shah, metals analyst with GFMS, a
unit of ThomsonReuters, referring to the Hindu festival of light in October,
when gold is traditionally bought.

She said many buyers bought in the first half of the year,
when the gold price corrected at a time they feared more future highs.

Demand in the second quarter was 38 percent up on the year
earlier, but in the July-to-September period, it slid 23 percent to 203.3
tonnes, according to the WGC.

“Many people brought forward their purchases to the
first half in the expectation prices would go higher,” Shah said.

With prices near 30,000 rupees – viewed as the current
ceiling because price charts indicate a stiff resistance level there after the
Nov 15 record of 29,212 rupees – Indians are turning in gold jewellery to melt
down, temporarily reversing a long-term trend of falling scrap supply.

“Current rupee prices provide an excellent opportunity
for someone to melt or recycle their gold hoardings,” Shah said, adding
that all the scrap is old-fashioned or worn, implying people are not cashing in
for quick profits.

One 50-year-old man took his grandmother’s 280-gram necklace
to be melted down and found it worth 630,000 rupees.

“As far as the wedding season is concerned, people are
getting their old gold, or if they have invested in 24-carat gold, they are
converting that gold into ornaments,” said Jain, who himself wears a gold
chain and gold-plated watch.

The WGC said in the third quarter Indians re-used about 15
tonnes of gold, up from 10 tonnes in the second quarter. That’s still down from
22 tonnes in the third quarter of 2010 but Shah pointed out that it bucked a
long-term trend of declining scrap.

Shah said the lack of more recent purchases coming into the
scrap market showed the long-term mood remained bullish.

“Longer term, scrap is trending down because of
positive price expectations. As of now, people have only been talking of 30,000
rupees and until you have a higher number, you’ll see this kind of liquidation
in the market,” she said.

The rupee’s fall to record lows against the dollar has
driven domestic gold gains, which continued after global prices peaked, and has
fed volatility, and nervousness, among buyers.

The rupee hit a record low of 52.73 to the dollar on Nov 22.
Gold futures on the MCX exchange are around 28,688 rupees per 10 grams with
global prices near $1,713 per ounce.

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Rajan Venkatesh, bullion managing director at ScotiaMocatta,
said a depreciation of one percent in the rupee meant a rise of 0.7-0.8 rupees
in the price of gold.

“Demand is not that buoyant right now, due to price
increases, and the bigger problem is the rupee, which has depreciated
significantly,” he said.

Spending is squeezed by India’s inflation, now close to 10
percent in a seemingly never-ending climb, while base lending has risen 13
times since early 2010 to stand at 8.5 percent.

Consumers had funds tied up in underperforming assets, said
Jain, whose association groups 10,000 jewellers.

“The easy liquidity has stopped as people’s money is
stuck in property and stock markets,” he said.

Sales in Mumbai, India’s biggest property market, are down
more than a quarter this year, as rising prices and high interest rates deter
buyers. India’s stock market has fallen nearly 25 percent since the start of
2011.

Bora, whose family hails from the western Indian state of
Gujarat, said her budget for wedding jewellery had dropped to 250,000 rupees
($4,800) – about half what she spent on her sister’s wedding eight years ago.