Gold may be down, but not out. Not as yet, any way. After ten years of double-digit price appreciation, in 2013, prices in dollar terms fell as much as 28 per cent. In other currencies too prices fell, but by a lower rate. For the yellow metal, it was one of the worst years in recent memory with rates reaching the lowest level of $1,181 an ounce.

However, over the last few weeks, the market has rallied on the back of a weak dollar and slightly weaker macro data. Prices have stayed well above $1,300/oz, hitting multi-month highs. In London, gold PM Fix on Monday was $1,335/oz. Interestingly, with firming prices, gold’s discount to platinum has now shrunk to $100 an ounce.

As per latest available CFTC data, Comex gold speculative positions have risen. There has been a steady increase in recent weeks, thanks to markedly rising institutional investment. “Gross longs are now at their highest since June last year and continue to chip away at the negative sentiment towards gold”, remarked an expert. At the same time, physical market is still not supportive with import controls in India continuing and softened buying by China post the Lunar New Year holidays. Recent inflows into physically-backed ETPs have of late turned into outflows, albeit at a slower pace. While the macro environment and forex markets are neutral to gold, investor sentiment appears bullish, and is seen driven by the technical picture. Gold has consolidated above its 200-day average near 1302 and still holds bullish potential, according to chartists who see resistance at 1333 and 1360 while support may be available at 1295 and 1302.

With equity markets marking some gains, the dollar poised to gain strength and tapering decision by the US Fed in place, support for gold will have to come from either the physical market or from investors. Silver too has rallied on the back of gold, with prices rising above $22/oz. Silver’s net long position on the bourses has also risen sharply. According to analysts, a substantial part of the move has come from reduced shorts rather than new longs.

It is by now well recognised that gold’s price appreciation potential has considerably reduced and that the current firmness in the world market may be temporary.

Downside risks lurk. Flow of positive macro data will drive prices towards $1,200/oz and even lower. It is no surprise that producer-lobbies continue to project a demand picture that is somewhat divorced from reality.

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