TORONTO (Commodity Online): Gold scarp sales had turned India, world’s largest consumer of gold,  and exporter of yellow metal in the initial months of this year.

Indian housewives and small households sold their old gold to make a killing form the soaring gold prices in January and February and gold traders exported the scarp gold to Dubai for melting.

But, that trend is slowly vanishing. With sales of gold scrap falling by more than 40% in the second quarter of 2009, to around 350 tonnes across the globe.

According metals consultancy GFMS, although the dollar gold price was slightly higher in the second quarter than in the first, average prices in local currencies were relatively flat

However, one reason for the retreat may be that a large slice of near-market scrap supplies had already entered the market, GFMS said.

Many consumers in India believed the price had reached its peak in the first quarter and rushed to sell even though the second quarter rupee price actually rose in comparison to the first, GFMS said in a statement.

We could see a bit of a lull over the rest of the summer, but that still leaves us with plenty of potential for a fresh surge in scrap should the gold price start to get exciting again, said GFMS.

And so it’s difficult to see how another record year for scrap can be avoided - but quite whether it reaches levels big enough to derail any price rally is a hard one to call.

GFMS believes that the fundamental elements of old scrap and jewellery fabrication can get unfairly ignored by market commentators, who sometimes portray the gold price as solely a function of what is happening in the investment arena.

In the first quarter, gold investment soared to more than 700 tonne, more than four times the volume of a year earlier, but the price struggled to breach the $1,000/oz mark.

GFMS believes that this underperformance can be attributed to activity in the physical market, as jewellery fabrication slumped and scrap sales leapt.

There are some interesting features to scrap looking further ahead - what role does the growing pool of product have?
Will the shift from plain to gemset materially dent volumes?  And what about scrap from non-jewellery sources? The gold price rose to $940,46/oz on Friday.

GFMS has said that it expects an inflation-driven surge in gold investment will send the yellow metal to new highs in the second half of 2009.