On the Comex division of the New York Mercantile Exchange, gold futures for October delivery traded at USD1,771.45 a troy ounce during U.S. afternoon trade, easing up 0.17%.
Facing record gold prices at home, buyers of the yellow metal in India are swapping old jewelry for new as they prepare for the country's festival season.
The popularity of gold recycling, as opposed to fresh purchases with cash, is likely to weigh on demand in India, the world's biggest consumer of physical gold, and moderate the latest upswing in global prices, industry officials and analysts said.
Fall and early winter is a key time for India's gold consumption. That is when roughly two-thirds of annual purchases are made as Indians prepare for the Hindu festival season, which spans several weeks and coincides with the height of India's wedding season. Both traditionally involve the giving of gold jewelry.
But prolonged weakness in the rupee, which has pushed up domestic gold prices in India to records, has forced some to rethink their plans.
Gold futures on the Comex division of the New York Mercantile Exchange have shot up 9.4% over the past month, as central banks around the world have embarked on measures to stimulate their economies. The moves, which some analysts say increase the risk of inflation, have boosted gold's allure, as some see the metal as a hedge against rising prices.
While gold futures, which ended roughly flat at $1,769 a troy ounce on Comex on Wednesday, are 6.3% off their record settlement hit in August 2011, gold prices in the Indian market hit a record of 32,421 rupees ($601) per 10 grams (0.35 ounces) on Sept. 13 and are at 31,300 rupees, up 10% from a record notched a year ago.
Central-bank stimulus efforts are a powerful force keeping gold prices buoyant, but falling demand in India, fueled largely by a weaker rupee, will "keep a top" on prices, said Jim Steel, a precious-metals analyst with HSBC.
To be sure, some analysts said demand trends in India could reverse course together with the rupee. Strategists at UBS said the rupee will be bolstered by recent market overhauls introduced by India's government. "The tide could turn for Indian physical buying in the coming weeks as the outlook on the rupee shifts to positive," the strategists wrote this week in a research note.
But if gold prices keep moving higher, the market will likely see more old gold return in the form of scrap or recycled jewelry as some buyers seek to cash in gains. "Traditionally, very high prices have stimulated an increase in recycling, not just in India but globally," Mr. Steel said. The Bombay Bullion Association predicts that gold demand in the peak period from September to December could halve from last year's level to between 200 metric tons to 250 metric tons. "Volumes are sharply down," Mr. Kothari said.
According to the World Gold Council, gold demand in India fell 36%, to 383.2 tons in the first six months of the year compared with a year earlier, as prices rose. Demand for jewelry was down 30%, while investment demand was down 45%. In addition to a weak rupee, patchy rains during the monsoon season have also contributed to falling Indian demand, as farmers poured money into saving their crops, leaving them with less cash for gold purchases.
Girish Choksi, an Ahmedabad-based bullion dealer, said new gold sales would pick up only if prices fall to 29,000 rupees per 10 grams, or 7.3% from current levels. "Then everybody would rush," he said. Only a rise in the value of the rupee, reducing import prices in local-currency terms, is likely to achieve this, he said.
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