Mumbai, 23 August 2011: Reuters

Record high prices could pinch gold demand in India, the world's biggest consumer, during the key festival buying season in September and October, but investment demand will help ensure record imports in 2011, the head of India's leading trade body told Reuters.

"If prices stay at current levels, demand will be lower during the festival season. But if prices fall to 25,000 rupees (per 10 grams), then it will rise," Prithviraj Kothari, president of the Bombay Bullion Association, said in an interview on Monday.

"Overall (India's) imports I think will be more than 1,000 tonnes despite lower sales during festivals," he said. India's key October gold contract on the Multi Commodity Exchange hit another record high on Monday at 28,244 rupees ($618.44) per 10 grams while international prices rallied towards $1,900 an ounce. Interest in the safe haven commodity was fuelled by concerns over the global economic outlook.

"In January to June we have already imported over 500 tonnes. Now people are not only buying during festivals. They buy throughout the year. Whenever they get an opportunity, they buy," Kothari said. India, whose appetite for gold dates back centuries, imported a record 958 tonnes in 2010 and a recent Reuters poll forecast imports to fall by 12 percent in 2011. The Bombay Bullion Association's forecast in the poll was 950-1,000 tonnes.

Indians buy gold during festivals like Dhanteras and Deepavali, falling in October, because they consider them auspicious times for gifts and investments. Kothari said though demand has been rising for gold, demand for jewellery is falling as more and more people buy coins and bars.

"Two to three years back, 85 percent of gold consumption was in jewellery form. Now that has fallen to 70 percent. Investment demand is continuously rising due to higher (jewellery) making charges and wastage (at the time of sale)," he said, adding in coming years the shift towards investment will continue.

NO INCENTIVE FOR SCRAP SALES?

Despite record high prices, scrap sales are not rising in India and Kothari says they are unlikely to rise in the current scenario. "I don't think scrap sales will rise because of higher prices. The equity market is not giving returns, property prices are steady ... they can sell gold, but where will they invest their money after selling?" he said. "Now prices are going up and up only. So I don't think Indians will sell old jewellery," he added.

International spot gold prices retreated from early record highs near $1,900 an ounce on Monday, as a rebound in stock markets from last week's lows gathered pace, denting interest in so-called safe haven assets like bullion. "I think gold could cross the $2,000 an ounce level, may rise to $2,200 by the end of 2011," Kothari said, given a loss of confidence among investors in other asset classes.

"Interest rates are very low in the U.S. and Europe. Lots of speculative money is coming into the market. Everyone is talking about gold, buying gold ... They are losing faith in other asset classes," he said. He added that prices could correct before heading over $2,000 per ounce.

"It may fall to $1,750 before rising to $2,000," he said, as people paused to take profits in the metal.

Ends --

By Rajendra Jadhav, Reuters - for Commodities Now.