Analysis - Mumbai attacks may give India a reason to buy gold

By Ruchira Singh

MUMBAI (Reuters) - A series of deadly attacks in the financial hub of Mumbai, coupled with lower world prices, might give Indian consumers a reason to buy gold as they worry that the hit to investor sentiment will keep equities and currencies subdued.

But the rise in demand may not be enough to lift the world price of gold -- now a fifth below a record high of $1,030.80 struck in March -- as a credit crisis and weak demand for commodities keep most investors away.

Traders added that any pick up in demand is unlikely to happen for a couple of weeks until the market stabilises.

"If people buy, they will probably buy physical gold rather than anything else like futures," said Ajay Mitra, India head of the World Gold Council.

Mumbai is one of the largest gold hubs, estimated to be trading around half of the 700-800 tonnes of the precious metal imported each year into India, the world's largest gold consumer. It houses around 400 jewellers and 1,000 traders and wholesalers, according to data from analyst Bhargav Vaidya.

It is also the main financial centre in India, and initial investor reaction to the attack suggested that India's traditionally resilient markets would take a bigger hit than from previous episodes in the city's violent history.

While the spot market in the city's Zaveri Bazar and the futures markets remained shut, banks reported minimal business as consumers stayed indoors following the attacks by suspected Islamist gunmen on a railway station, a popular restaurant and plush hotels, where they held hostages.

"We are open for business today, but as of now, no one is buying gold," said a dealer in a bank. Banks are the primary importers and sellers of gold in India.

The attacks, which have forced the closure of the country's stock and commodity exchanges, come ahead of the marriage season in India when demand for gold jewellery surges.

Industry officials said any big impact on prices would depend of whether the crisis drags on for more than a few days.

"Until we know more about who's involved, what their aims and ambitions are, it may well be considered to be an isolated incident," said Darren Heathcote of Investec Australia in Sydney, referring to the attacks in India.

"Therefore, it's less likely to affect the rest of the world, and therefore, the gold price," said Heathcote, adding that gold was likely to stay in the current range of $770 to $825.

CAUTIOUS TRADING

India, the world's largest gold consumer, has suffered a wave of bomb attacks in recent years. Most have been blamed on Islamist militants, although police have also arrested suspected Hindu extremists thought to be behind some of the attacks.

"It will take at least two weeks for normalcy to come back. It takes time for confidence of the consumers to return," said Haresh Kewalramani, a director at the Bombay Bullion Association.

"Even shopkeepers would be scared to open for business," Kewalramani said. Gold buyers were hard to find.

Industry officials said any slowdown in business in the next couple of weeks would be temporary and demand would pick up at a faster rate to offset any drop in purchases.

"If you look at the events, it is not targetted at the mass public, but at foreigners. So, from that perspective, it will have a limited impact on the Indian consumers," he added.

In 2007 India imported 769.2 tonnes of gold, of which 28 percent went for investment, according to the World Gold Council. The investment segment has been growing faster than jewellery as more and more Indians have been buying bars and coins.

Dealers and traders said investment buying may rise a bit but they would wait for prices to soften.

"The attacks won't make a difference as prices are too high. People have already bought at lower prices earlier," said Suresh Hundia, president of the Bombay Bullion Association.

Gold, which was often bought by investors in times of uncertainty, has staged a dramatic rebound since tumbling to a 13-month low of $680.80 in October.

Kewalramani said recent falls in the stock market and the general tightness of liquidity had moved most investors away even from gold, but some large investors would continue to eye prices.

"I don't see any panic buying or selling that is because prices don't move to local conditions," Vaidya said. "Besides most people already have the basic gold they need for their jewellery."

Gold edged up on Thursday after the euro bounced against the U.S. dollar. It was trading at $814.55 an ounce, up $2.80 an ounce from New York's notional close on Wednesday.

(Additional reporting by Biman Mukherji in NEW DELHI and Lewa Pardomuan in SINGAPORE)

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