High Gold Prices Likely To Cut In To Indian Demand

That's what Morgan Stanley has concluded in a forecast for Indian gold demand to drop 16% this year.

"Gold appetite in India seems to be waning as prices are too high. India's gold demand is likely to fall by 16% in 2011( over last year)," the firm's survey based on interviews with over 1,600 chief wage earners from middle and high-income households across urban India revealed.

In its survey, the firm found that property still outranks gold as an investment choice. The good news is, buyers tend to hold on to the gold they've got and are normally reluctant to sell.

Commenting on the implications of the findings, Head of India Research at Morgan Stanley Ridham Desai said, "A fall in the demand for gold will have a positive impact on liquidity and deposit growth, and thus for banking sector earnings."

That last excerpt speaks to a motive for concluding that gold demand will fall. So far, demand for gold has outpaced expectations in India; that survey may not have included the mainstay of gold demand: rural buyers. Farmers are flush with cash thanks to food inflation, and some of the profits are going into gold. To the extent that rural denizens are land-hungry, it would be to expand their plots. Any such land-hunger would be for business purposes - not investment purposes.

Despite my doubts, though the report might have detected a coming drop-off, or saturation, in demand.