Wednesday, Apr 04, 2007

LONDON (Dow Jones)--Historically high prices and erratic price movements pushed gold jewelry demand and fabrication dramatically lower in regions such as India and Turkey last year, gold consultancy GFMS said in its annual survey, released Wednesday.

Gold jewelry demand fell by 16%, or 428 tons, in 2006, GFMS estimates, to a 15-year low of 2,280 tons.

India, Turkey and Italy accounted for half of the gross decline, with India registering a 90-ton drop, GFMS said, although consumers adjusted to higher, more stable prices in the second half of the year.

A shift to lower gold weights and more gem-set jewelry in markets such as the U.S. prompted declines in Turkish and Italian fabrication, with Italian production dropping by 21%, it said.

Heavy destocking by retailers, who delayed stock replenishment anticipating lower and less volatile prices, further affected fabrication, according to GFMS.

Marginal growth was seen in China, which overtook Italy and Turkey to become the second largest global manufacturer behind India, it noted.

While price developments could see jewelry demand contract further in 2007, GFMS said, the decline is unlikely to match the 16% fall seen in 2006.

In addition, lower domestic jewelry fabrication and a surge in locally generated scrap resulted in a 50% fall in bullion imports to the Middle East, GFMS noted.

GFMS said the volume of old jewelry being scrapped last year rose across the region by 112 tons, or 34% on year, mostly in response to high prices during the first half of 2006.

Turkey and Saudi Arabia posted the highest scrap increases, as the consultancy said a Saudi equity collapse led to a mass liquidation of gold assets.

Jewelry fabrication across the region fell by 24% in 2006, with Turkey, Saudi Arabia and Egypt accounting for over 80% of the decline, it noted.

"Given the volatility last year, the fall in Middle East jewelry demand was hardly surprising, and if the volatility continues this year, we could see another fall in fabrication across the region," said GFMS Executive Chairman Philip Klapwijk.

-By Melanie Burton, Dow Jones Newswires; +44 (0)20 7842 9412; melanie.burton@dowjones.com

(END) Dow Jones Newswires

04-04-07 1213GMT