Gold purchases by India, the world's largest importer of the metal, are down to a trickle because of high prices, prompting local traders and jewellers to reprocess scrap and jewellery to cater to rapidly falling local demand.  

Gold imports fell by a third to 20 tonnes in January this year from a monthly average of 60 tonnes last year. By all available indications, imports will be negligible in February when prices crossed the Rs 15,000-limit.

Prices of the metal have been hitting record highs in India over the past couple of months, with a weaker rupee adding to the rise in gold prices denominated in dollars.

Bombay Bullion Association President Suresh Hundian said February would probably register the lowest monthly import since 1994, when gold was put on the open general licence list.

Sources in the association estimated that total imports would fall to around 400 tonnes in 2009--one of the lowest in the last decade, and almost 45 per cent lower than last year's level.

The fall in imports started in October, immediately after the credit crisis, which resulted in lower demand for Indian jewellery overseas and a consequent fall in exports.

Local traders said Indian consumers were waiting for prices to fall before they resumed gold purchases.

But some of them were also using the opportunity to cash in on the high prices and sell gold and gold jewellery. As a result, immediate import demand dropped, traders said.

All India Gems & Jewellery Trade Federation Chairman Ashok Minawala said scrap gold sales jumped 20 to 25 per cent from the average daily recovery of 500 kg.

"The recovery of used gold has intensified 15 to 20 per cent because of higher prices," added Ajay Mitra, managing director--Indian sub-continent, World Gold Council.

Since the yellow metal does not lose any quantity, chemical and physical properties, traders procure gold from retail consumers at a discount.

Typically, for a 10 gram piece of jewellery, a jeweller would pay for 9 to 9.5 grams after factoring in the use of other metals in the product, which would bring the repurchase price to around Rs 13,500.

In contrast, an importer has to pay customs duty of Rs 10,300 per kg. Add to that the 1 per cent value added tax, 0.1 per cent octroi and 0.1 per cent stamp duty, and total duties add up to 2.25 per cent.

The price differential between imported gold and that recovered from scrap through re-melting was estimated to be around 0.67 per cent, but given the significant savings in duties, the total differential is estimated at 3 per cent, traders said.

Traders also said a part of the recycled gold was being moulded into coins and crude jewellery such as simple bangles that were being exported to markets such as Dubai to leverage the arbitrage opportunity more fully.