Thursday, May 10, 2012

By Biman Mukherji & Debiprasad Nayak

Of DOW JONES NEWSWIRES

NEW DELHI (Dow Jones)--Gold has steadily fallen since early March in the international market, prompting many to predict further downside that may in fact support a revival in consumer demand, but a weakening rupee could keep domestic prices close to record highs in India, the biggest market for gold.

That will likely dim the prospect of a recovery in Indian demand even though domestic trade has returned to normal after prolonged disruptions amid protests against a government plan to tax the import and sale of gold at higher rates.

Indian Finance Minister Pranab Mukherjee Monday agreed to roll back the newly introduced domestic tax on the sale of jewelry while retaining the higher import tax announced in the budget.

Global prices have, meanwhile, fallen below the psychologically important $1,600 a troy ounce mark as persistent euro zone concerns buoyed the dollar, with gold trading more like a risk asset rather than as a safe haven.

At 0410 GMT, spot gold was trading at $1,591.60/oz, down sharply from above $1,775.00/oz in the last week of February.

Indian buyers would have usually seized the opportunity to buy more gold, but a weak rupee has become the spoiler. The rupee was trading around INR53.20 to a dollar Thursday, down from around INR49.00 to a dollar at the end of February.

"The weakness of the rupee is countering the fall in the dollar price of gold and is likely to act as a drag on demand in the world's biggest market," said Jeffrey Rhodes, the Dubai-based global head of precious metals at INTL Commodities DMCC. "For me, the key to gold demand in India is the price in rupee terms."

Gold in India was quoting around INR28,400/10 grams Thursday, close to its peak of INR29,800/10 grams, seen in December.

When international prices fell by about $80/oz this month alone, local prices should have fallen by around INR1,000/10 grams, but the decline was only about INR500/10 grams, said Aurobinda Prasad, chief analyst at Karvy Comtrade Ltd.

According to Prithviraj Kothari, president of the Bombay Bullion Association, India's import demand this year will be no more than 750-800 metric tons because of high prices, down from 969 tons last year.

"We will be happy if it crosses 800 tons this year," said Pradeep Unni, head of research at Richcomm Global Services, a commodity brokerage in Dubai.

Analysts say the central banks feeble attempts to support the rupee may not be effective because the country has limited foreign exchange reserves. That could mean gold in the domestic market will remain in the INR28,000-INR29,200/10 grams range for several weeks, if not longer.

Such high prices will keep demand at bay even though the usually busy wedding season kicks off next month. "There will be some increase in purchases, but volumes would be small," said Girish Choksi, an Ahmedabad based bullion dealer. "The situation would have been totally different if Indian prices had fallen in tandem with global rates."

Chosksi said there is pent up demand in India, but the right buying conditions are yet to emerge.

-By Biman Mukherji, Dow Jones Newswires; 91-11-43563335; biman.mukherji@dowjones.com

(END) Dow Jones Newswires

10-05-12 0509GMT