(REUTERS) -- Simone Bora is contemplating the unthinkable -- an Indian wedding without lavish amounts of gold after record high prices and a sinking rupee have dimmed her hopes of sparkling at the party.
We need to think whether to buy gold or not because nearly 30,000 rupees for 10 grams is too much, Bora said in a jeweler's shop in Zaveri Bazaar in Mumbai, one of the world's biggest gold markets. Thirty-thousand rupees is $580.
Indians are usually the biggest buyers of gold in the world and from October to December, the calendar is full of festivals and weddings, creating many opportunities for people to flaunt their finery.
But international prices of spot gold have risen 21 percent on the year, their 11th straight year of rises, and a weakening rupee is also increasing domestic prices.
The higher prices have taken some of the sheen off Indians' age-old fascination with gold as an investment against inflation -- currently near double-digits -- particularly as a lot of cash is tied up in laggard equities and real estate markets.
Things are looking dull for jewelers, with demand yet to pick up from a fall last quarter, and gold peaking at 29,212 rupees for 10 grams on November 15. Gold hit a record around $1,920 per ounce on global markets in September.
This sudden rise (in gold prices) has made people wait for some time to buy, said Kumar Jain, vice-president of the Mumbai Jewellers' Association, adding that his gold business has dropped some 40 percent in volume since the start of the year.
Now expectations are growing for prices to slip toward 27,000 rupees around the end of the year, spurring those who can to delay purchases and those who have hoarded gold to cash in.
Imports (of gold) will be down 20 to 25 percent in the last (December) quarter and it will have a negative impact on global prices, said Prithviraj Kothari, president of key trade body the Bombay Bullion Association, which has about 400 members.
Reuters market analyst Clyde Russell expects that there should be interest for gold as a hedge, as long as inflation in India remains high, but that demand could be affected by further gains in global prices.
Industry players polled by Reuters expect exactly that -- predicting prices could hit as much as 31,500 rupees by the end of June next year.
Q3 SLIDE IN JEWELRY DEMAND
In a report this month, the World Gold Council (WGC) said Indian jewelry demand slid 26 percent in the third quarter, while total imports were down 20 percent.
The WGC expects demand to pick up in the last three months of 2011, pushing imports to a record of more than 1,000 tonnes, but in the narrow streets and family-run market shops of Zaveri Bazaar there was little to support that optimism.
Diwali festival buying was slow and winter buying for weddings has also been slow, said Gargi Shah, metals analyst with GFMS, a unit of ThomsonReuters, referring to the Hindu festival of light in October, when gold is traditionally bought.
She said many buyers bought in the first half of the year, when the gold price corrected at a time they feared more future highs.
Demand in the second quarter was 38 percent up on the year earlier, but in the July-to-September period, it slid 23 percent to 203.3 tonnes, according to the WGC.
Many people brought forward their purchases to the first half in the expectation prices would go higher, Shah said.
TURNING TO SCRAP?
With prices near 30,000 rupees -- viewed as the current ceiling because price charts indicate a stiff resistance level there after the November 15 record of 29,212 rupees -- Indians are turning in gold jewelry to melt down, temporarily reversing a long-term trend of falling scrap supply.
Current rupee prices provide an excellent opportunity for someone to melt or recycle their gold hoardings, Shah said, adding that all the scrap is old-fashioned or worn, implying people are not cashing in for quick profits.
One 50-year-old man took his grandmother's 280-gram necklace to be melted down and found it worth 630,000 rupees.
As far as the wedding season is concerned, people are getting their old gold, or if they have invested in 24-carat gold, they are converting that gold into ornaments, said Jain, who himself wears a gold chain and gold-plated watch.
The WGC said in the third quarter Indians re-used about 15 tonnes of gold, up from 10 tonnes in the second quarter. That's still down from 22 tonnes in the third quarter of 2010 but Shah pointed out that it bucked a long-term trend of declining scrap.
Shah said the lack of more recent purchases coming into the scrap market showed the long-term mood remained bullish.
Longer term, scrap is trending down because of positive price expectations. As of now, people have only been talking of 30,000 rupees and until you have a higher number, you'll see this kind of liquidation in the market, she said.
DULLED BY DEPRECIATION
The rupee's fall to record lows against the dollar has driven domestic gold gains, which continued after global prices peaked, and has fed volatility, and nervousness, among buyers.
The rupee hit a record low of 52.73 to the dollar on November 22. Gold futures on the MCX exchange are around 28,688 rupees per 10 grams with global prices near $1,713 per ounce.
Rajan Venkatesh, bullion managing director at ScotiaMocatta, said a depreciation of one percent in the rupee meant a rise of 0.7-0.8 rupees in the price of gold.
Demand is not that buoyant right now, due to price increases, and the bigger problem is the rupee, which has depreciated significantly, he said.
Spending is squeezed by India's inflation, now close to 10 percent in a seemingly never-ending climb, while base lending has risen 13 times since early 2010 to stand at 8.5 percent.
Consumers had funds tied up in underperforming assets, said Jain, whose association groups 10,000 jewelers.
The easy liquidity has stopped as people's money is stuck in property and stock markets, he said.
Sales in Mumbai, India's biggest property market, are down more than a quarter this year, as rising prices and high interest rates deter buyers. India's stock market .BSESN has fallen nearly 25 percent since the start of 2011.
Bora, whose family hails from the western Indian state of Gujarat, said her budget for wedding jewelry had dropped to 250,000 rupees ($4,800) -- about half what she spent on her sister's wedding eight years ago.