Weak monsoon to hit gold demand: WGC

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Gold demand in India, the world's top consumer, is likely to fall by a fifth in the second half of 2012 from a year ago on higher prices and as weak monsoon rains hurt incomes of rural households, a senior World Gold Council (WGC) official said.

Lower demand during the second half will drag the country's total demand in 2012 to 688-700 tonnes from 933.4 tonnes a year ago, Ajay Mitra, managing director of India and the Middle East at the WGC, said on Thursday.

"There is going to be the impact of the monsoon ... but the government will probably come out with measures like rescheduling of loans and others, which can minimise the impact of lower rainfall," Mitra said.

India is facing its second drought in just four years, which can drive up food prices and erode spending power, crimping demand for goods from tractors to gold. More than half the population relies on the rural economy.

Investment and jewellery demand from Indian consumers plummeted 38 per cent to 181.3 tonnes in the second quarter. Buying was hit by a hike in import duties and record-high local prices due to a weak rupee.

India's gold imports in first half of 2012 fell 36 percent on the year to 383.2 tonnes, giving China an opportunity to become the world's number one gold market this year.

The rate of decline in gold demand in India has been moderating, however, Mitra said.

"The worst is over ... July gold (imports) numbers are far, far better. They are the best since January," Mitra said.

SCRAP SALES

Tight liquidity and consumers' perception that gold prices have little room to rise from current levels lifted scrap supplies to 30 tonnes in the second quarter, the highest level in over three years, Mitra said.

"Forecasting scrap sales is very difficult. It depends on what consumers feel. If they rise (in the second half), obviously imports will go down," he said.

Imports in the second quarter plunged over 56 per cent on the year to 131 tonnes, WGC data showed.

The most active gold for October delivery on India's Multi Commodity Exchange was up 0.23 per cent at Rs 30,073 per 10 grams by 1010 GMT, not far from a record high of Rs 30,428 hit in June.

Investment demand, which lifted India's gold imports in 2010 and 2011, is also affected by the perception that the upside is limited.

Investment demand accounted for 31 per cent of total demand in the second quarter, down from 39 per cent during the same period a year ago, WGC data showed.

"If the current situation continues, then jewellery will get back to a 75-76 per cent share," Mitra said.

A view that the Indian rupee, which determines the landed cost of imported gold, could rise against the dollar prompted many buyers to hold back on gold purchases, which they may execute in the second half.

The rupee has lost over 5 per cent so far in 2012.