The honeymoon is over for India's gold market

Neighbourhoods across India are alive with nightly marching bands and fireworks displays as couples rush to marry before the Hindu wedding season ends later this month. But one traditional symbol of the ceremonial season, gold, is in short supply this year. With prices hitting records almost daily, gold is too expensive for all but the wealthiest.

"This is now beyond the reach of the common man," said Naveen Arora, a partner at Vishesh Jewels and Crafts. This is the lowest [sales] level ever. In terms of jewellery, it's down 30 per cent." That may be a conservative estimate. India is the world's biggest gold jewellery market, but this year more than a quarter of small shops are reported to have closed as Indian brides opted for imitation jewellery, rather than the real thing.

The Bombay Bullion Association said recently that sales last month were only half of the 34 tonnes sold in the same month last year. "Demand in India is nil when it should have been at its peak because of marriages," said Suresh Hundia, the president of the association. The Dareeba Kalan gold market in Old Delhi confirmed his story. Sellers were many but buyers few and far between. "We will not buy today," said Dr Ritu Sabharwal, while negotiating the sale of her sister's broken 24-carat bangle. "We have heard prices are going down. We will wait maybe a month or so."

But low demand is having no effect on prices. Gold keeps climbing on international metals exchanges, hitting nearly daily records as investors fret about the fate of the US dollar. Gold futures were up 1.36 per cent at US$1,216 an ounce yesterday, continuing bullion's rise that this year has been 38 per cent. In India, as elsewhere, gold's value as an alternative store of value is beating its allure as a symbol of wealth, prestige and respect.

"Yesterday I got somebody; he was interested in 1kg of gold," said Mr Arora. "I think demand for raw gold is still there and will even go higher, but for jewellery, the demand is not going to recover. But for investors, they have the money and they are all ready to buy." Many are following the example of the Reserve Bank of India (RBI), which confirmed investor nervousness towards the US dollar with its October purchase of 200 tonnes of bullion from the IMF.

The RBI paid about $1,045 an ounce for about half of the 403.3 tonnes of gold set aside for sale by the IMF and is rumoured to be interested in adding to that purchase. Although the RBI played down the significance of the purchase, there is no doubt it signals a general move by central banks around the world to diversify foreign exchange reserves away from the US dollar. The greenback is weakening steadily as investors worry about a deteriorating balance sheet marked by huge US dollar debt issuance to fund a budget deficit and growing debt.

The RBI's purchase held an unusual significance in India. Only 18 years ago, India was forced to pawn its gold to the IMF to avert a balance of payments crisis - an event that is recalled with embarrassment by many in the country. With the move, India instituted drastic changes to its state-planned economy, paving the way for its emergence as a global economic powerhouse. The October purchase confirmed India's new economic stature; the country's central bank now holds the 11th-largest gold reserves in the world.

Meanwhile, as international markets expect the price of gold to rise even higher, many goldsmiths in Dareeba Kalan are forecasting a price decline connected to the end of the Indian wedding season. They also said other assets were more favoured this year. "The high-class people are buying diamonds," said Vinod Sharma, a sales assistant at Shri Ram Hari Ram Jewellers. "They are selling gold to buy diamonds."

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