India continues to be the largest gold consumer in the world despite the price of yellow metal shooting through the roof.

According to Gold Field Mineral Service India's demand for gold has increased by 12 tonnes to 131.9 tonnes in third quarter or July to September. In the Q3 of 2002, the gold demand was 117.8 tonnes.

According to GFMS, total global demand for gold in the third quarter is estimated to have risen by over 5 per cent year-on-year.

By far the largest contributor to this increase was implied net investment which jumped more than 150 tonnes quarter-on-quarter.

Other gains were also seen in fabrication (chiefly from India and Turkey) though bar hoarding fell. Producer hedging activity contributed a fraction to supply after seven consecutive quarters of often hefty additions to demand.

Official sector sales were markedly higher year-on-year after very low levels recorded in Q3 of 2002. Old scrap managed a modest rise. In contrast, mine production was essentially flat, slipping just 0.2 per cent.

On the supply side, initial estimates for mine production suggest Q3 output fell year-on-year to 699 tonnes, GFMS said. Lower output in South Africa, the United States and Indonesia accounted for the bulk of the decline.

A drop in grades at Grasberg, the world's largest gold producing mine, part explained the fall in Indonesia.

In recent news, a slippage of material in a section of the Grasberg open pit has caused delays in mining. Full year production at the mine was expected to fall some five tonnes short of forecast levels.

Partly offsetting losses, output from Australia and Russia rose. There were reports of a successful start to the season in the main alluvial producing regions.

Official sector sales in the third quarter were up 54 per cent year-on-year. July-September last year was an unusually quiet period.

Banks within the Central Bank Gold Agreement (again dominated proceedings, accounting for over 80 of the 129 tonnes sold in the third quarter.

Switzerland was once more the largest seller within this group at 73 tonnes. The only other significant sellers within the CBGA were the Netherlands and Germany. Outside of the CBGA, a notable seller was Greece, which disposed of 20 tonnes in August.

Old gold scrap rose a modest 5 per cent year-on-year though it was noticeably lower than the volumes recorded in the first and second quarters of 2003.

This quarter-on-quarter slowdown was common to many price sensitive markets in west, south and east Asia but was most marked in Egypt, India, Thailand and Indonesia.

Perhaps the chief reason for this change is that these markets are becoming accustomed to prices comfortably above $350; such prices are therefore no longer as strong a signal to sell as they were earlier, especially in the first quarter, GFMS has said.

The balance of producer hedging activity is estimated to have contributed a fraction (just one tonne in fact) to supply in the third quarter, the first time that this has done so in seven consecutive quarters.

This somewhat abrupt change, however, does not really represent any shift in attitudes in favour of active hedging.

Indeed, de-hedging continued in the third quarter with nominal positions of forwards, options and non-vanilla products all lower on a quarter-on quarter basis.

A part of the reason for the measured rise in the global book at the end of the September quarter was the $42/oz increase in the valuation price compared to the end of the previous quarter, which resulted in an increase in the delta against vanilla options.

The chief feature on the demand side in the third quarter was the jump in the implied net investment figure to 185 tonnes from 34 tonnes in April-June.

This change and producer dehedging's abrupt deceleration means that the third quarter can be viewed as the period in which dehedging handed over the baton to investment as the chief supporter of prices.

Although there have been signs of a broader based interest in gold developing, investment in the third quarter remained dominated by short term speculative players, as witnessed by the sharp rise in the Comex fund long of over 150 tonnes from early July to end September (using the non-commercial data as a proxy).

Jewellery fabrication rose a modest 5 per cent year-on-year. This was chiefly due to very strong gains in just India (thanks to a good monsoon, stable rupee prices in July and August and healthy economy) and Turkey (where a rebound in local consumption was boosted by improving exports).

Indeed, without these two countries, global jewellery fabrication fell. The vast majority of the losses were accounted for by Italy, in part as a result of market share loss in the United States to rival exporters.

Other forms of fabrication saw yet stronger gains, especially in the categories of electronics (mainly in east Asia) and coins (nearly all Turkey). Bar hoarding fell heavily on both a year-on-year and quarter-on-quarter basis.

The vast majority of the decline here was attributable to four countries; India, Indonesia (which both saw sharply lower hoarding levels), Japan (where selling back was concentrated in August as the yen price approached the 1,400 yen/g level) and Brazil (which swung to active divestment), GFMS has stated.