Gold prices hit record high, seen dampening demand

A salesgirl is reflected in a mirror inside a gold jewellery showroom in Kochi April 24, 2012.

MUMBAI (Reuters) - Gold prices in India, one of the world's leading consumers, hit a record high on Friday, tailing gains overseas, and industry officials say the elevated price will further squeeze demand, which fell 29 percent on year in the first quarter of 2012.

The most-active June delivery on the Multi Commodity Exchange was up 1.1 percent at 29,469 rupees per 10 grams by 1527 GMT, after hitting a record high of 29,586 rupees. The earlier record high for the front month contract was 29,516 rupees hit in November 2011.

"We are entering in lean season with record high price. So, obviously we will see sharp drop in demand in next two months," said a member of Bombay Bullion Association, who declined to be named.

Demand for the bullion in the South Asian country usually drops between June and mid-August when there are no major festivals and weddings. Farmers will also be busy with planting during the rainy season starting from June.

India's vast gold jewellery market suffered a 19 percent drop in demand in the first quarter of the year, and investment demand tumbled 46 percent, pressured by a weak and volatile rupee among others.

The drop in demand during January to March allowed China to remain the world's top gold consumer for the second quarter in a row, with its gold demand up 10 percent to 255.2 tonnes, beating India's 207.6 tonnes, according to the WGC data.

The rupee plays an important role in determining the landed cost of the dollar-quoted yellow metal. The Indian rupee strengthened on Friday on the back of dollar sales by corporates but it still posted a ninth consecutive weekly drop, its worst losing streak since the Lehman crisis.

Global gold extended gains on Friday to rise more than 2 percent after U.S. non-farm payrolls data reignited expectations for another round of quantitative easing in the United States.

Gold demand in India is likely to moderate in 2012 as higher inflation trims disposable income at a time prices are stubbornly high on a weak rupee, the head of the World Gold Council in the country said last month.