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precious metals

In the world's largest gold-consuming country after China, demand has just fallen off a cliff.

Saurabh Gadgil, a sixth-generation jeweller, says it's the worst year in India since he took charge of the family business in 1999. The 39-year old chairman of PN Gadgil Jewellers, which has stores in the country, Dubai and the United States, has offered discounts and freebies to lure customers. "There's not much you can do as the whole industry is suffering," he said by phone from the city of Pune.

A slump in prices has given jewellers a glimmer of hope before the Hindu festival of Diwali this weekend and Dhanteras on Oct. 28, the most auspicious day in the year to buy gold. But consumption is still set to shrink to 650 tonnes in 2016, the smallest in seven years, according to a Bloomberg survey of five jewellers and traders. Indians bought 864 tonnes last year, a quarter of global demand, and a record 1,006 tonnes in 2010, World Gold Council data show.

"In my 33 years in the market, physical demand has never been this dead," Marwan Shakarchi, chairman of MKS (Switzerland) SA, a Geneva-based refiner and trader, said in Singapore earlier this month. "It's a sign the government is serious about cracking down on black money," he said, referring to a campaign by Prime Minister Narendra Modi to curb undisclosed income.

While global prices have tumbled about 8 per cent from the highest in more than two years in July to $1,273.60 (U.S.) an ounce on Tuesday, they're still up 20 per cent this year as central banks extend bond-buying and keep interest rates at low or negative levels in an effort to stimulate growth.

The story is different in India, where a litany of events have hurt demand, from a price surge in the first half of the year and a jewellers' strike in March and April, to weak rural purchases because of poor monsoon rains and the government clampdown on undisclosed income. A goods and services tax scheduled to start on April 1 may hurt consumption further.

Black money, a colloquial term for income that has illegally escaped taxes, is a hot political issue, with Ambit Capital estimating the black economy at 30 trillion rupees ($450-billion). Mr. Modi has tried everything from threatening advertisements to talks with corporate executives to make people declare secret funds in a country where only a small percentage file tax returns.

About 100 tonnes of demand were lost in the first half partly because jewellers stopped work to protest an excise tax on jewellery made and sold in the country, according to the Gold Council.

"The tax has been a big problem for us," said Narendra Bhandari, a jewellery wholesaler in Mumbai. "About 50 per cent of the workers left for their hometowns after the protests started and shops were shut for couple of months across the country. Many have still not come back."

The World Gold Council estimated in August that consumption would be 750 to 850 tonnes this year. In the first half, a confluence of factors hurt buying, John Mulligan, director of member and investor relations at the council, said in Singapore last week. "But there may well be pent-up demand, with Diwali and the wedding season in the second half pushing consumption higher," he said.

More people have visited the Zaveri Bazaar in Mumbai, the country's biggest bullion market, in the past week to buy gold for Diwali, Dhanteras and the weddings that follow, where it's part of the bridal trousseau or gifted as jewellery. Good rains this year also offer some hope for jewellers as rising incomes boost rural purchases, which make up 60 per cent of consumption.