Gold prices have come under increasing pressure in recent days. Major drivers of the precious metals market namely physical demand, investment demand and currency are at best neutral.

Last Friday saw physically-backed gold ETP holdings fall by over 10 tonnes, the largest daily decline in the last one year. Despite that, inflows to date since the beginning of this year are an estimated 34 tonnes. Current holding are an estimated 1,745 tonnes.

However, it is important to note that given that a large part of the inflows occurred in January and February, most of the holdings are currently loss making. This suggests that holdings are vulnerable and more outflows cannot be ruled out.

A slight weakening of the dollar has provided some support; weak US macro data have not helped its cause. Positive payroll results last week – non-farm payrolls rebounding by 223,000 and private payrolls rising by 213,000 – are a shot in the arm. Data relating to retail sales and consumer sentiment have been mixed.

Physical demand too is not exactly robust with two of the world’s largest markets China and India not showing signs of demand growth. Traders see a further weakness in China’s appetite for the yellow metal as evidenced by easing trade volumes on the Shanghai Gold Exchange. Interest in India remains modest and the recent weakening of the rupee to 64 to a dollar has effectively raised local prices.

In addition, with the marriage season coming to a close and the likely onset of monsoon in about two weeks, demand conditions will turn dull until harvest time in September. Given these factors, it should come as no surprise if gold prices trend lower towards $1,150/oz levels. At that level, there could possibly be some revival of demand for the metal.

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