Between 2000 and 2007, gold jewelry sold in India accounted for one ounce-in-nine sold worldwide. One ounce in every five wound up as an Indian import (its domestic mines produce less than six tons per year), ready to be hung off young brides as 24-carat dowries or worked into bracelets and necklaces for the international market.

The single-largest gold bullion consumer, India’s own final demand outweighed the next largest market — China — by almost 57%.

But Chinese gold buyers have now caught up in 2008. Or so says the latest data from the World Gold Council. The switch isn’t only due to surging Chinese demand (up by 15% year-on-year between Jan. and April). It comes because Indian gold sales have collapsed — down 65% in the first six months of 2008 from ‘07 according to the Bombay Bullion Association — as consumers balk at record high prices:

Our best guesstimate — working off the data provided by our friends at Virtual Metals in London — says Indian gold demand this year could be on track to fall as low as 250 tons, well below half the average of 2000-2007.

What might this mean for world gold prices? Four caveats apply:

Diwali — the Hindu religion’s festival of lights — falls in October after the harvest ends (more on this below). It marks India’s peak gold-buying period.
The drop in world jewelry sales led by Indian consumers comes in terms of physical tonnage; the dollar value of world purchases actually jumped by 20% between Jan. and April compared with last year.
Global investment demand continues to surge, with turnover doubling for U.K. gold dealers and new purchases rising sharply (both by volume and value) across Southeast Asia and the Middle East.
India’s private citizenry is no different from the rest of the planet right now, in that they can’t move for strong reasons to keep buying gold.
Strong reasons to buy gold? First, just like everywhere else, India suffers the problem of money. Much too much money.

The quantity of Rupees in circulation has more than doubled since 2003. So-called “broad money” supplies (M3) have risen 10 times over since the start of the 1990s.
That makes each Rupee in your pocket worth less every day. Inflation in the cost of living is now running above 11% year-on-year, more than twice the Reserve Bank of India’s target.

But even with interest rates set at a six-year high, the real returns paid to cash — the real rate of interest after inflation — remains sharply negative for Indian savers, way down at minus 3.4% annually. That’s even worse than the negative real rates now paid to U.S.