Indian gold jewellery consumption fell by 44 per cent in the December 2011 quarter compared to the year-ago period, according to World Gold Council data. This drop was for the second quarter running. China's demand, on the other hand, grew 2 per cent in the same period.

This resulted in China overtaking India to become the largest gold jewellery consumer for the second quarter in a row. The September 2011 quarter had seen India's jewellery demand fall 25 per cent against a 13 per cent expansion in Chinese demand. Assaulted by a depreciating rupee and high inflation, India's share in global demand dropped to 24 per cent in the six months ended December 2011. In the year-ago period, India had accounted for 33 per cent of global demand. China's share moved up to 28 per cent from 23 per cent in the same periods.

Cost pressures

The sharp depreciation of the rupee in the second half of the year, which pushed up domestic gold prices, had much to do with the paling demand. International gold prices moved up sharply in the September 2011 quarter, touching a high in September before cooling off towards the end of the year. Gold prices in rupee terms though, hit a high much later in November 2011.

Domestic gold prices were up 32 per cent in the December 2011 quarter compared to the year-ago period against an 11 per cent rise in international prices. Gold prices in China, on the other hand, were up just 6 per cent for the December 2011 quarter. Demand for jewellery in India, therefore, took a harder blow than that in China. In tonnage terms, India consumed 228 tonnes of gold in the six months ended December 2011 while China's demand was at 262 tonnes.

Further, in the Indian consumer's case, rampant inflation meant that jewellery had to battle for wallet share. Along with food and fuel, prices of discretionary items such as apparel also went up. Festival buying, usually bunched in the last two quarters, failed to lift purchases. Listed jewellery retailers with a national footprint such as Titan Industries and Gitanjali Gems reported minimal growth in domestic jewellery volumes, especially in the December 2011 quarter.

Investment offtake

While buying jewellery may have appeared frivolous in the face of rising living costs, Indians did not seem to appreciate gold as an investment either. Global gold investment demand rose on economic uncertainties in developed nations — the December 2011 quarter saw ETF demand almost quadruple.

Including coins and bars, global investment demand was up 28 per cent for the six months ended December 2011. Moving in the opposite direction, India's investment demand fell 29 per cent in the same period. The dark note on which demand ended in 2011 is unlikely to change in the current quarter. Gold prices have begun to rise again, with international prices already up 13 per cent from January to date. Import duties on gold and silver have also been hiked, increasing the cost consumers will have to pay.

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