Jewellers in India are pinning hopes for demand in 2010 on the domestic market as international destinations struggle, but extraordinary price volatility is limiting sales, even in auspicious periods.

India, the world’s biggest market for the precious metal, had made successful forays into target markets for mid-priced jewellery, but wholesalers exhibiting at Vicenza’s international jewellery trade show said uncertainty across financial markets was also mirrored in export activity.

“For the moment, all the markets are slowing down, except for India. Europe is slowing down, the U.S. is not out of the woods yet,” said Pradeep Kumar Godha, chairman and managing director of Shantivijay Jewels ltd, in Mumbai.

The industry-backed World Gold Council has been cautiously optimistic on the outlook for demand in 2010, pinning improvement on economic recovery driving jewellery demand and investor appetite for bullion.

Global gold demand fell 11 percent in 2009, hammered by a 20 percent drop in jewellery demand which accounted for 52 percent of the overall demand last year. Identifiable investment demand rose 7 percent in 2009.

Gold prices have surged in recent weeks, hitting record highs in dollar , euro, sterling and Swiss franc terms but the driving force behind the rally, euro zone sovereign debt worries and concern on the pace of global economic growth, is being felt on wholesale and retail markets.

Hemant Shah, director of Hammer Group, a major jewellery wholesaler and core Council member of India’s state-backed Gem and Jewellery Export Promotion Council, said that the uncertainty had turned attention back to Asia.

“India and China are the growing markets, it is these markets that have strong consumer activity,” he said.

“India has not been very badly hit by the recession. Also Indian consumers today have demographics that work very well,” he added, referring to the benefit of international companies outsourcing labour.

PRICING LIMITS

Shah said that while wedding jewellery demand in India would remain strong, the complete domestic picture was not entirely plain sailing, with volatility denting consumer sentiment.

He said clients were reporting a disappointing outcome from Askhay Tritiya, a religious occasion where demand usually jumps because it is considered an auspicious time to buy jewellery and coins.

“Although it is deeply entrenched in religion, this year demand fell by about 60 percent, according to clients I speak with,” he said.

“There is a line beyond which if prices start to shoot up, even with religion, people will not cross. The desire for jewellery is not going to go away any time soon, but there’s a limit where people will hold back for dips,” he added.

Jewellers said another side-effect of the strong gold price is increased use of diamonds in wedding jewellery, with some consumers opting to spend less on gold content and more on stones.

(Reporting by Veronica Brown; Editing by Louise Heavens)