Gold dipped to around $922 an ounce on Wednesday as investors locked in profits after the metal spiked to $933.10 a day earlier on expectations of more interest rate cuts in the United States and fears about South African output.
Holders in Indonesia, Hong Kong and Japan sold back gold bars, coins and jewellery to get cash, while the physical market in India came to standstill as consumers stayed away from jewellery shops at a time when demand normally picked up.
The wedding season is under way in main consumer India, where gold jewellery is the most common gift during religious events and forms an essential part of the dowry basket.
"High prices are likely to deter some of the jewellery fabrication. From what I gather, I think that has been the case," said David Moore, a commodity analyst at the Commonwealth Bank of Australia. Gold bars were offered at a discount in Hong Kong, Tokyo and Singapore, where dealers noted an increase in sales of scrap from neighbouring Indonesia, which is Southeast Asia's largest consumer. "Plenty of people were selling back gold when it touched $900. Plenty of people have their gold melted. I think global gold jewellery trade is practically dead," said Leo Hadi Loe, a consultant with Jewellery Indonesia, a Jakarta-based firm that promotes gold in the world's largest archipelago.
"I believe Indonesia's consumption would not reach 50 tonne in 2007. It could reach a maximum of 40 to 45 tonne. Practically from July onwards, there was no new gold in the market. There was a lot of sell back," he said. Indonesia's jewellery consumption dropped 26.1% to 57.7 tonne in 2006 as Indonesians cashed in their gold after a rise in government-set fuel prices pushed inflation to more than 18% to a six-year high in late 2005. Reuters
In East Asia, jewellery makers in China were well-stocked ahead of the Lunar New Year in February and there were purchases from locals, but bullion houses in Japan were swamped by consumers who cashed in on gold's rise.
Gold bars in Tokyo were offered as a discount of between 25 and 40 US cents an ounce to the spot London price, unchanged from last week.
"There's a huge sell back from the general public. That's why gold bar premiums are under pressure," said a dealer at bullion house in Tokyo.
Analysts said sentiment was bullish, with gold already rising 11% in 2008, after a jump of 32% last year, as investors bought the metal on uncertainty in the dollar's outlook, record high crude oil and turmoil in financial markets.
But gold may also struggle to sustain the uptrend if there was a recession in the United States, given worsening financial market conditions.
"Maybe the target is $950. But I don't think it will be easy to break that level," said Loe of Jewellery Indonesia, referring to a lack of support from the physical side.