Gold demand in Asia hit by higher spot prices, weak currencies

By A. Ananthalakshmi and Siddesh Mayenkar

SINGAPORE/MUMBAI (Reuters) - Demand for physical gold in Asia slowed this week as spot prices surged to three-month highs and emerging market currencies plunged.

Traders in top buyer India stayed away on uncertainty over new import rules, with premiums holding steady in a market that has not seen fresh supplies for more than five weeks.

Spot gold has gained largely on short covering and technical buying in the past few sessions, but could come under pressure if demand fails to pick up ahead of festivals that start next month in India and China, traders said.

"We have seen a definite drop off in physical demand," said one Singapore-based dealer. "There has been some selling over the last two weeks due to weakening regional currencies."

The rout in Asian currencies was prompted by outflows of foreign money from emerging markets as investors position for an expected roll back in the U.S. Federal Reserve's massive bond-buying programme from next month.

In Hong Kong - the key gold supplier to China - gold kilo bar premiums declined to $2.50 an ounce from $5 two weeks ago. Tokyo premiums fell to 50 cents from $1.50, while those in Singapore dropped to $1.50.

"Demand has slowed in the past few days," said Dick Poon, general manager of Heraeus Metals in Hong Kong. "I think consumers bought too much in the last few months."

Dealers said prices have to drop to about $1,350 from the current $1,420 for demand to pick up strongly. They were anticipating strong demand as buyers come out of the summer doldrums and enter the festival and holiday buying season.

"If the markets continue to move up, the demand will be less than what we expected," said one Hong Kong based dealer.

INDIAN IMPORTS YET TO RESUME

India, which is battling a record trade deficit, has imposed several rules including a 10 percent import duty to stem the flow of gold into the country.

Indian traders were waiting for clarification from the customs department regarding a rule issued on July 22 that ties imports to exports.

"We are still waiting for an operating circular," said Rajesh Khosla, managing director with MMTC PAMP. "The customs will come up with an operating circular any day now."

Customs officials were considering asking gold traders to produce a proof of payment for their jewellery exports, trade body officials told Reuters earlier this week.

"Business is absolutely dull now. Customers have disappeared as prices have shot up, we are just using our old supplies," said Rahul Gupta, director of PP Jewellers in New Delhi.

The Indian rupee, which with an around 20 percent drop is the worst performing Asian currency this year, was also weighing on demand.

Gold for October delivery on the Multi Commodity Exchange hit a record high of 34,622 rupees per 10 grams on Wednesday. Premiums were steady at $40 an ounce due to the lack of supply.

(Editing by Himani Sarkar)