>Jewelry demand to return despite higher gold prices

Singapore - Gold is in unchartered territory for the traditional consumer in the jewelry market, but many are facing up to the reality that higher prices are here to stay, with burgeoning investment demand making up for any a dip in jewelry demand this year.

That is forcing even traditional buyers back in to the market as they reluctantly accept elevated price levels. This shift in attitude could remove the last hurdle before gold can resume a rally that appears to have hit a roadblock now.

"I would not advise anyone to short this market," said Jeffrey Rhodes, CEO of INTL Commodities in Dubai.

Since breaking higher in mid-September, gold has confounded expectations by comfortably consolidating above $1,000 an ounce and analysts say they expect a gradual march higher in 2010, regardless of periodic corrections.

Despite the strength in prices this year, a rise in investment demand on inflation expectations and for currency diversification purposes, has more than offset the weakness in the jewelry sector with overall gold demand in the first half at 1,744 tons, compared with 1,520 tons in the first half of 2008, according to Gold Fields Mineral Services data.

The most worrying statistic for bulls has been the continued decline in Indian gold bullion imports which are expected to fall below 300 tons in 2009, down from 396 tons in 2008 and more than 700 tons in 2007.

However, India's gold sales during the festival period of Oct. 12-19 actually rose 5.7% from a year earlier to 56 tons despite near-record prices in rupee terms, the World Gold Council said Friday.

This may not immediately result in higher imports as scrap supply will ensure sufficient supply for now, but any dip in gold prices is likely to lead to renewed Indian imports, traders said.

"India's will be ready to buy if gold corrects. You might not see gold below $900 again," said Rhodes. India is the biggest importer of gold bullion.

Physical traders in Singapore also expect buying to pick up strongly on dips below $1,000, a level where buying dissipated in early 2008. "Indian buyers never buy into rallies. There is always a lag time before they will be comfortable with higher prices," said a Singapore-based trader at an international bank.

The optimism is supported by historical data that suggest the jewelry market is not actually that sensitive to bullion prices.

According to GFMS data, global jewelry demand held fairly steady during the last bull run, dropping only 10% to 2,404 tons in 2007 from 2,680 tons in 2002, despite prices increasing by 200% over the same period.

Jewelry demand slumped to 2,186 tons in 2008 and looks likely to come in below 2,000 tons in 2009, with the first half down 22% on year at 765 tons, but the timing suggests this has more do with the global recession, with prices rising only 18% from the start of 2009.

"It is an exceptional year (in terms of demand weakness)," said Yunus Oguzhan Aloglu, executive vice president at the Istanbul Gold Exchange, who expects a demand recovery in 2010.

A positive pattern was evident during China's golden week holidays when jewelry demand was stronger than in previous years.

“Even with the price higher, Chinese investors continue buying gold,” said Peter Lim Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.

Moreover, scrap sales won't be a major source of supply in China, said Lila Lu, the Beijing-based head of precious metals at China Minsheng Bank. “Chinese people will not trade jewelry in (to buy new designs) as in India. It’s handed down the generations.”

Source: COMMODITIESCONTROL