Gold prices have once again failed to hold on to the recent gains and are currently testing key support levels. On Friday, spot gold prices were ruling $1,203.62 an ounce, falling from the last week’s $1,235. In the short-run, rising physical demand is expected to prop the yellow metal.

As a result, net speculative positioning in the bourses has risen due to fresh longs and short covering.

In the medium-term, portends are ominous. The macro environment is increasingly turning neutral for the yellow metal.

The announcement of the US Federal Reserve to end the stimulus programme is likely to have a limited effect on gold prices as completion of the tapering process has been factored in already.

The dollar continues to gain strength on the back of steadily improving economic performance of the US. Inflation expectations in the world’s largest economy have also remained muted. Geopolitical tensions – Russia-Ukraine conflict and terrorism in Iraq – that provided support to gold are seen easing.

Although not as rapid as in 2013, investor selling has somewhat accelerated. Holding in the physically-backed exchange-trade products (ETP) are now well below the psychological 1,800 tonnes and stand at an estimated 1,770 tonnes with redemptions totalling 30 tonnes in October. ETP interest has remained soft ahead of the Fed meeting. On the physical side, demand has returned to the market, clearly of a seasonal nature. How long will it sustain is debatable.

For instance, China’s import demand, despite being high, is seen stalling and in relation to 2013, imports in 2014 have weakened. On the other hand, Indian imports have picked up momentum. In the first six months of the current year, arrivals averaged 50 tonnes a month versus 28 tonnes in the previous six months.

In September, to meet festival demand, gold imports into the country touched a high of 94 tonnes. This has again caused some concern within policymaking circles. So, policy uncertainty persists.

At the same time, start of the wedding season should continue to generate demand; and for consumers, the precious metal is now available at attractive prices not seen in last four years.

As most of the support factors have weakened, there is expectation gold prices will be under pressure.

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