Experts say that high prices are likely to deter Indians from heavy gold buying this week during Diwali. This religious festival is normally an auspicious time to splurge on the metal.
Gold demand is expected to be moderate, they said, as the country's middle-class -- struggling to cope with high inflation and rising fuel and food prices -- may not have enough spare cash or savings to buy the yellow metal.
Gold jewellery showrooms around Mumbai's Zaveri Bazaar, which was hit by a deadly bomb attack in July, have remained half-empty during the festive season.
India is the world's biggest importer and consumer of gold, with the country accounting for over a third of global demand.
On top of that the yellow metal is traditionally seen as a hedge against inflation, which in India is approaching double digits.
But with rising costs, Indians have become price sensitive consumers, looking to buy gold on price falls instead of waiting for a religious festival or wedding, analysts said.
Some, who like garment trader Dinesh Kapadia prefer buying gold coins and bars as an investment, are not planning to purchase gold at all this Diwali.
"Prices are too high. I will wait," he told AFP, adding that he expected prices to correct further later this year.
Gold prices surged this year on frenzied buying by investors, large funds and central banks around the world in the aftermath of a US sovereign debt downgrade and plunging global equity markets.
International gold prices reached a record $1,920 per ounce in early September and while they have since slipped they still remain up 15 percent from the start of 2011.
The precious metal, whose key drivers are investment and jewellery, is widely seen as a safe haven in difficult times, but analysts say a combination of factors is keeping demand weak.
Indians bought 540 tonnes of gold in the first half of 2011, up 21 percent from the same period last year, according to data from industry body World Gold Council (WGC).
But buying has been sporadic since then, even though prices have fallen, with some buyers holding off in expectation of further drops.
Several gold experts have warned that the rapid gold price surge could be a "bubble" waiting to burst.
"People bought a lot (of gold) earlier in the year," said Rajesh Mehta, chairman of India's largest gold jewellery maker and exporter, Rajesh Exports.
Mehta expects "moderate" buying this Diwali, despite the recent fall in prices.
Since the turn of the century, when gold averaged $255 per ounce, prices have skyrocketed by nearly 550 percent and industry figures predict gold could hit the $2,000 mark next year.
Anand James, chief analyst at trading firm Geojit Comtrade, said: "Currently buying is sporadic and indifferent."
He expects demand for the metal during Diwali this year to be lower compared to 2010, when "momentum was stronger".
Ritesh Gupta, marketing head of Totaram Papalal and Sons, described jewellery sales as "very low".
"Demand is down by 50 percent (from last year)," he told AFP by phone from southern city of Hyderabad, where the 110-year-old firm is based.
He blamed the rising cost of living and low disposable income -- after the central bank hiked interest rates 12 times since March 2010 -- for poor sales.
Gold buying normally peaks in the Diwali season on "Dhanteras" day, when Hindus buy precious metals or new utensils as a sign of good fortune, which falls on Monday.
Buying continues until December, which is India's wedding season.