Gold price surge unlikely to have impact on domestic demand

MUMBAI: Gold's advance to a record Rs.22,977 a tola (10 gm) in Mumbai is unlikely to have much impact on demand, which slows at this time of year, but could magnify the loss of demand due to an increased scrap sales by rural households, gold market experts based in Mumbai, said.

Driven by worries in the Eurozone - Ireland joined Portugal and Greece on Tuesday as the third euro-area nation to have its credit rating cut to below investment grade - overseas spot gold hit a record high $1578.85 an ounce (31.10gm), breaking a previous high of $1575.38 on May 2.

Bhargav Vaidya, a spokesperson of Bombay Bullion Association that comprises bullion dealers from the wholesale gold market, said demand which typically falls by around 30-40% at this time of year would not be impacted much by rising prices but the loss of demand could be exacerbated if the price advanced towards the Rs.23,000-mark as farmers would sell their old jewellery to buy agriculture inputs such as seeds and fertilisers.

Rural folk are among the biggest consumers of gold in a country that imported 957 tonne gold last year. Demand from rural households comes down during June-August and picks up in the run up to the festival season in September, a time when farmers loosen their purse strings on receiving proceeds from the sale of kharif crops sown in June-July.

However, a rapid rise towards Rs.23,000 - BBA recorded its highest closing price of Rs.22,937 on April 30 - could queer the pitch by inducing rural households to sell old gold ornaments to purchase farm inputs. Jewellers, who bank on international suppliers for inventory, could end up buying scrap and meet their stock needs, reducing imports further if gold rises in the interim.

Jitendra Jain, whose company Jugraj Kantilal is one of the country's biggest scrap dealers, agreed that scrap supplies would rise if gold hitsRs.23,000. "Till yesterday (Tuesday), scrap supplies slowed to a fifth of what they were, but are bound to increase with gold close to the Rs.23,000-mark," he said.

Gold may rally to a record $1,600, outperforming silver, as investors favour the metal to protect their wealth because of concerns about Europe's sovereigndebt crisis and slowing global growth, reported Bloomberg , citing Credit Suisse Group .

Depending on imports to meet a bulk of its demand, India is a price taker in gold. Apart from taking overseas price cues, currency plays a role in influencing gold priced in rupees. It is perceived that with Europe facing sovereign issues, foreign investors could pull out cash from Indian equity markets, weakening the rupee in the process.

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