Gold is causing the Indian jewellery industry a lot of heartburn. Because it is a sort of currency with a value inverse to the value of the US dollar, gold prices have been shooting up in dollar terms as the greenback’s value has foundered in the swamp of the sub-prime mortgage meltdown and decline in US consumer confidence.

Having already tested $730 a troy ounce, the yellow metal looks like shooting up to heights no one wants to even think about. Frightfully expensive gold could see much of the Indian Diwali season consumption (by far the largest sales period of the year) badly hit.

Theoretically however, this shouldn’t really be a problem as the dollar has also been sinking against almost every other currency in the world, including the Indian rupee. A rise in the price of gold in dollar terms, therefore, is compensated for by the fact that the dollar itself costs that much less in other currencies. So Indian consumers — by far the world’s largest gold buyers — shouldn’t really have a problem as the rupee has strengthened to under 40 to the dollar and the yellow metal is actually getting cheaper.

But here’s the strange bit. The majority of primary gold that is consumed in India comes from fresh imports. Importers have to pay for the gold in US dollars. By the time the metal lands in India and is put up for sale, the dollar might have sunk so much that if one sells the gold at the international dollar/ounce rate, the importer will actually earn less in rupees than he paid for in dollars. You have to have nerves of steel or be slightly suicidal to want to import gold.

With less primary gold coming into the Indian market, jewellery manufacturers will have that much less raw material to work with. This could mean shortages. Which could again, theoretically push up gold and plain gold jewellery prices…

It could mean good news for diamond jewellery though. Use more diamonds and less gold. If you must know, the biggest diamond buyers at the Hong Kong Watch & Jewellery Show that is currently under way, are Indians…