India: Gold Prices Set to Crash?

Short-term panic hits traders, but long-term gold demand continues to soar...

IS THE Gold Price – now hitting all-time highs – set for a crash?

   On Tuesday in Mumbai, bear fever gripped the Indian Gold Market as traders and dealers said they expect a crash in the price of gold in the domestic bullion market.

   Gold had hit an all-time high of Rs 11,492 on the Multi Commodity Exchange, the largest commodity bourse in India. The most-active gold contract has gone up more than 7% so far in 2008 vs. the Rupee.

   But traders say the physical demand for gold jewelry is dull, as many people are expecting that the Gold Price will come down.

   Overseas gold touched an all-time high of $914 an ounce on Monday on strong investor buying, driven by the Dollar's slide and financial market turmoil.

   Longer-term, the Bombay Bullion Association said that India's imports of gold in calendar year 2007 could have fallen by 20% due to the surge in Gold Prices. In 2006, India, the world's largest consumer of the precious metal, imported about 715 tonnes of gold.

   But the country continued to consume anywhere between 600 to 700 tonnes of gold worth $6-7 billion last year – and domestic production of gold is only about 2 tonnes per annum.

   The strengthening of the Rupee against the US Dollar – plus rising consumer spending –raised India’s gold demand by as much as 72% in the first half of last year. A report from the World Gold Council says demand for gold in India reached an all-time high of 317 tonnes in the second quarter of 2007.

   The figures are nearly double what was sold in 2006 and equal to half the gold mined globally for the same period.

   Most telling, of the total Indian demand, only 10-15% was met by recycled gold – sold back to the jewelry industry by consumers taking advantage of last year's high Gold Prices. That indicates strong demand for fresh imports.

   The latest reports say India has emerged as the fourth-largest merchandise gold export market for Australia in 2006-07. Gold exports comprise nearly half of all merchandise exports to India from Australia, says a report from the Australia India Business Council.

   The AIBC also said in 2006-07 that India was Australia’s largest market for gold, the second-largest market for coal and copper ore, and third-largest market for wool. Australia has also agreed to allow the export of uranium to India, subject to strict conditions.

   And as India's economic boom has continued, Australian exports to India rose 37% overall in 2006-07 as against 22% in 2005-06. Last year, merchandise exports from Australia to India were worth AU$10.1 billion, up AU$2.7 billion.