With all the macroeconomic and political uncertainty in the world, gold continues to be a bright spot in many portfolios. Investors have flocked to the yellow metal and funds like UBS E-TRACS CMCI Gold ETN (NYSE:UBG) as a way to protect themselves from these circumstances. While gold buying in the developed world is seen more as a hedge against "doomsday" and inflation, in some emerging nations it has taken on more of a cultural significance. Nowhere is that more true than in India. The nation leads the world in gold consumption and various cultural influences aside from investment help spur overall demand. So when gold imports into the BRIC superstar begin to dwindle, it's something gold investors shouldn't take lightly.

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Higher Prices + Volatile Rupee
With a variety of auspicious festivals and celebrations marking the Hindu calendar, India has historically been one of the largest gold buyers in the world. However, that could change as higher prices are deterring buying. Gold imports are poised to decline for the first time in three years, and data is already pointing to softening demand. Typically, India will see a surge in import/buying activity during the fourth quarter as its main festival season runs October to December. However, gold imports in the last quarter of 2011 fell 44% to 157 tons. That's well short of the analyst forecasted 281 tons. According to the World Gold Council, total Indian imports of gold rose 1.1% to a record high of 969 tons in 2011. However, actual gold usage in India fell 7% to 933.4 tons last year. (For related reading, see The Gold Standard Revisited.)

According to analysts surveyed by Bloomberg, gold imports are set to drop by 7% throughout 2012; the main culprits for this drop are higher global gold prices and volatile currency. India's currency, the rupee, has fallen around 16% in 2011 and that has caused major pain for gold buyers. Global gold prices advanced roughly 10% last year, but due to the weakness in the rupee, bullion futures in India surged 32%. With many pundits calling for gold to retest its historic highs, that could mean big trouble for the Indian gold market. Coupling that with the nation's steadily rising food costs and buyers simply can't afford much of the precious metal.

Finally, due to fluctuations in the Indian calendar, 2012 will see the number of days considered to be auspicious for gold buying at the fewest since 2004. Analysts predict that this will certainly influence India's gold buying throughout the year.

Exercising Caution
While China's surge in gold buying will help stem some of India's declines, any dips in the nation's imports could dent gold's near term price potential. The ProShares UltraShort Gold (NYSE:GLL) can be used by investors worried about these declines. This ETF is designed to deliver twice the daily inverse return of gold bullion prices, and it has been a poor performer in the long term. However, as a short term hedge, the fund makes sense. For those wanting more "oomph" from their short term hedges, the VelocityShares 3x Inverse Gold ETN (Nasdaq:DGLD) provides triple the leverage.

The World Gold Council predicts that India's short-term demand outlook may by lackluster, but the country still has the potential for future growth in gold consumption. The best play for investors could be taking advantage of near term weakness in gold prices to add to the metal. While the SPDR Gold Shares (NYSE:GLD) is still the king in terms of assets, the iShares Gold Trust (NYSE:IAU) might be a better choice. The iShares fund undercuts the SPDR on fees by 0.15% and still features a hefty $9.8 billion in assets. For those looking to accumulate gold over the long term, the lower expense ratio makes IAU a better choice.

Bottom Line
When it comes to gold imports, India reigns supreme. However, recent weakness in the rupee and surging gold prices has sent demand dwindling within the nation. For investors, India's gold outlook can serve as cautionary tale for global gold prices. Investors can either play the potential downside via funds like the PowerShares DB Gold Double Short ETN (NYSE:DZZ) or use that weakness to go long.

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Tickers in this Article: UBG, GLL, DGLD, GLD, IAU, DZZ

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