More than 25% of gold’s annual supply flows originate in the recycling of scrap. The global recession has now generated another recycling process altogether: the purchase and sale of jewellery items and gold bars entering the marketplace due to declining household wealth.

Gold bugs should take cognizance of the alarming pre-weekend announcement by the Bombay Bullion Association that gold imports into India, the world’s biggest gold consumer, fell 81% year-on-year in December 2008, as purchase orders through the complex gold chain (village-to-city) virtually came to a standstill. Indian gold imports for 2008 as a whole are estimated to have fallen by 47%.

Israel’s offensive in Gaza has caused a spike in gold prices over the weekend. But, unless there is conclusive evidence that the Gaza crisis will spread to Lebanon, any moves beyond $910 per ounce should be used to short gold via Exchange-traded notes (DGZ, DZZ) or, depending upon liquidity and market-sensitivity considerations, via Exchange-traded funds (e.g. UBG and SBUL.LSE). Thus far, Dubai gold shops confirm that aggressive statements from Tel Aviv have not resulted in panic buying; moreover, major gold traders in the Mumbai (Bombay) bullion market are ready to unload excess inventories around $910-935, given that nobody there believes that Hamas has the ability to extend the Gaza ground war beyond a few days.

Of course, the more fundamental argument in favour of higher gold prices (with some calling for $2,000-plus) is rooted in the safe-haven dogma. “With assets being devalued across the globe, central banks, money managers and even individuals will increase the gold allocation in their portfolios throughout the new year,” a spokesperson for the Bombay Bullion Association emphasized yesterday. “Demand will pick up in the second half of January since it is not considered auspicious to buy gold until the 14^th.”

But small-scale gold outlets in the Indian interior are pointing out that, as opposed to any inferences derived from a reading of the stars (i.e. numerology), what is really inauspicious about the Indian gold matrix is the increasing poverty levels in the countryside, and in the dramatic erosion in the wealth of lower-middle-class families in towns and junior cities. The last marriage and festival seasons saw an unprecedented trend towards minimal and selective purchases of jewellery; in fact, a record number of households are actually pawning or selling gold and silver possessions merely to survive. Almost two-thirds of physical gold purchases in India originate outside big cities like Mumbai, New Delhi, Chennai and Kolkata.

East Asia, the Indian sub-continent and the Middle East account for roughly 72% of world demand; 55% of world demand is attributable to just five countries: India, China, the US, Turkey and Italy. While Chinese demand rose by 24% in 2007, late-2008 statistics are expected to show a sharp decline. How many jobless workers returning to their villages from the once-booming industrial zones have pawned or sold their gold-denominated savings is still the subject of speculation in the Hong Kong media; but the manager of a gold dealing window in Guangzhau (formerly Canton) confirmed in a television show that sales of gold bars had slowed down to a trickle despite the Christmas shopping season. “The Chinese New Year may bring better news,” she hoped.

Gold’s reputation as an alternative store of value is only sustainable if the early-2008 demand-supply equation can be sustained; that demand-supply equation is now completely reliant on the equilibrium shift between those fleeing financial assets to invest in physical gold (not in futures and options) and those actually selling (or pledging) gold assets in order to survive. As far as gold production is concerned, there are enough mines and enough proven reserves (in South America, Africa, Central Asia and Russia) which evidence a solid base of supply. Furthermore, despite regional variations, production costs continue to justify maximum mining-capacity utilization even with gold in the $550-600 range.