Indian Jewelry here to Save the Day for Gold?

2011 gold jewelry demand seems to have risen in India and 2012 may be even better.

According to the head of Gitanjali Gems, India's largest jewelry retailer, gold jewelry demand in India is estimated to have risen 5 - 7% in 2011 and is predicted to grow another 10 - 15% this year.

This is some decent news considering how India's jewelry demand fell 26% in the 3rd quarter of 2011 to 125.3 tonnes after taking a hit from wide price swings and a weakening rupee. But that didn't scare Mehul Choksi, managing director over at Gitanjali Gems: "For the whole year we will end up with a 5-7 per cent volume growth ... [In 2012] I expect, as the prices of gold come down, it will once again catch up the momentum and will grow in volume by 10-15 per cent, " Choksi told Reuters today.

While I certainly agree with Choksi's volume growth forecasts for jewelry, I wouldn't completely bank on gold prices coming down to promulgate it. Yes, there logically would be an inverse correlation between gold price and jewelry demand (cheaper gold making it cheaper to make gold jewelry and total volume production of gold jewelry thus increasing), but gold jewelry still requires gold to create, and as demand for it increases so then will a demand for gold.

In other words, I believe that a more likely and accurate sequence of events is: gold prices have dropped some, then production of gold jewelry rises some, then sales and demand for gold jewelry reacts favorably, then demand for gold rises to accommodate newfound gold jewelry production requirements and thus gold price receives a nice buffer to move up by.

Convoluted I know, but I think that the recent slight correction in gold price may indeed have just been a setup for another bullish run with this convoluted chain reaction. Either way, more people buying gold, whether directly or indirectly via ETF, jewelry, etc., makes my heart tingle.

Be safe, be wealthy and above all else, be happy.

- Mitch

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