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Scrap gold sales peter out in India

India’s scrap gold sales are likely to drop this year in a reversal of a trend seen during past price rallies, as people are holding on to their family gold in anticipation that the bull run in the yellow metal won’t stop, traders said.

Sales of scrap gold in India were around 90 metric tons last year, and its flows during the first half of this year were estimated at about 5% below the level during the first half of 2010, Jeffrey Rhodes, global head of precious metals at advisory firm INTL FCStone, said on the sidelines of a conference in the southern tourist destination of Kovalam over the weekend.

“The same trend is likely to continue well through the year,” he said. “Its not what the price is, but the expectation of what the price will be that is driving the trend. The belief in India is that prices are going to go up.”

Traders said people expect the prices to rise close to $2,000 a troy ounce. On Monday, they rose to a record $1,882.55.

In the western Indian city of Ahmedabad, where people have often scrambled to sell old family gold when prices have gone up, supply of gold scrap has fallen sharply.

“Scrap sales are down by 50%-60%. People are feeling that gold is the only safe place left for investments,” said Pawan Chokshi, an Ahmedabad-based bullion dealer. “There are hardly any scrap sales happening and I think that’s a phenomenon cutting across India.”

“Even at these prices, people are feeling that it’s better to invest in gold rather than sell their old gold,” Mr. Chokshi said.

Traders said only those who were desperately short of cash were selling their family gold, and many were instead pledging their gold to borrow money to meet emergencies.

According to Mr. Rhodes, the underlying sentiment is that most people were long on gold.

Meanwhile, traders warned that a short-term correction in gold prices is likely because of heightened expectations.

Paul Walker, chief executive of metals consultancy GFMS, said everybody in India is expecting that gold prices will keep rising, but the underlying sentiment is something to be “nervous” about.

“Indians are buying gold at prices where people never expected to buy. What does this show,” he said, adding a price correction could come anytime in the next two weeks.

Write to Biman Mukherji at biman.mukherji@dowjones.com

Posted by on August 22, 2011. Filed under Precious metals. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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