By Neil Behtmann

CONSUMER demand for gold in Asia and India is tumbling in the face of investment and speculative buying that has pushed prices to record levels.

To be sure, while the Reserve Bank of India recently set the stage for gold to surge to last week's levels of US$1,179 an ounce by buying 200 tonnes, the Indian consumer and private sector have stepped up sales of the precious metal. Asian and Indian jewellery and hoarding demand has slumped while a growing number of people are taking advantage of the high prices by selling their trinkets and other items.

India, traditionally the largest gold market in the world, has experienced a 33 per cent decline in gold demand in the 12 months ended September 2009 and purchases are about half the levels at the beginning of the decade when gold was around US$300 an ounce, according to the World Gold Council (WGC).

In the meantime, the supply of recycled scrap gold from India at 227 tonnes is the highest in the world and is 50 per cent to 100 per cent higher than previous years, according to Virtual Metals, precious metals consultants.

The slide in jewellery, hoarding and industrial demand is also prevalent in Asian countries which are traditional buyers of gold. In the 12 months ended September 2009, jewellery and net retail investment in Hong Kong, Taiwan, Indonesia, South Korea, Thailand and Vietnam fell by 27 per cent to 200 tonnes. Recycled scrap supplies have also surged in these nations.

Japan's purchases are minimal compared with previous years and it was negative in 2008. The exception is China, which has experienced an 8 per cent rise in demand to 423 tonnes, but recycled gold there has also soared.

Singapore's demand figures were not published, but recycled supplies are around 14 tonnes, estimates Virtual Metals. Mines in China and the rest of Asia are taking advantage of the gold boom. China is now the world's largest producer with an estimated production of 296 tonnes a year, up from 220 tonnes in 2004.

It is well ahead of the traditional miners, notably Australia (230 tonnes), the US (215 tonnes), Russia (205 tonnes) and South Africa (200 tonnes). Production in Indonesia and the Philippines are well up on 2008.

In the UK and Europe, hard-pressed individuals struggling in the recession are responding to ads to sell gold. In London and the Counties, housewives are having gold parties and are selling their jewellery to go-betweens who in turn are taking a turn and are selling it on to precious metals refiners.

Global recycled gold that has been sent to the refiners to be melted into bars has soared by 37 per cent to 1,166 tonnes in the nine months ended September, according to the WGC. The last time there was such intensive sales of jewellery items for remelting was in 1980 when gold reached record heights at the time. Such was the flood that supplies from refiners, working at full capacity, overwhelmed the market in the 1980s, causing prices to tumble.

The latest WGC statistics cover a period in which gold averaged US$900 to US$960 an ounce.

According to anecdotal reports, jewellery, industrial and hoarding purchases have fallen further in the fourth quarter since gold has surged to levels approaching US$1,200 an ounce. Illustrating the trend, total growing supplies including global mine production, recycled gold and central bank sales, are now exceeding jewellery, industrial, hoarding and coin demand by a sizeable proportion.

Gold purchases of China, India and some other Asian central banks have offset sales by several European banks and the International Monetary Fund, but they are also price conscious.

The market is thus dependent on continual purchases of hedge funds and other speculators and investors - large and small - to keep the price going northwards. They are betting on a further US dollar slide.

According to the Commodity Futures Trading Commission, net futures and options positions of hedge funds and commodity trading advisers have reached 23 million ounces, while smaller speculators' positions are a further 47.5 million.

Including Exchange Traded Funds, total speculative and investment holdings are currently 111 million ounces or 3,452 tonnes, equivalent to about one year's mine and scrap production.

This article was first published in The Business Times.