After a short-lived rally towards $1,535 a troy ounce last week, gold has shed all its gains, having fallen below the psychologically important level of $ 1,500/oz early this week. In the coming days, the yellow metal is likely to remain stuck around this level.

A firmer US dollar, signs of easing trade tension between the US and China, better Chinese trade data and the continuing concerns over Asian demand have combined to weigh on the market. At the same time, ETF inflows have steadily increased to multi-year highs, having touched 2,500 tonnes, the highest since February 2013.

Conflicting factors

Clearly, gold market is riding on the horns of a dilemma, torn between opposing forces, including geopolitical tensions and trade tiffs on the one hand that raise its safe haven appeal, and weak demand conditions on the other that cannot be glossed over.

There is now consensus that physical demand is most unlikely to recover this year. Trade data speak for themselves. In August, gold imports into both India and China remained weak.

With the economic slowdown in China palpable, jewellery sales have weakened. Depreciation of the Chinese currency too has played a role, having made imports expensive. Demand conditions are not expected to improve any time soon.

Indian scenario

As a price conscious market, the Indian situation is no different. Despite occasional corrections, continuing high prices are proving to be a demand dampener. High international prices, weaker rupee and high rate of customs duty have combined to keep prices in rupee terms high and discourage buyers.

Even the traditional Diwali festival in India in the last week of October may witness no significant sales growth as consumers have turned rather cautious and are unwilling to spend in the backdrop of slowing growth, rising joblessness and falling confidence among entrepreneurs.

Despite policy interventions to revive business confidence, the subdued mood is unlikely to improve any time soon. Rural areas continue to suffer because of weak agricultural crop prices.

Downtrend to continue

The US dollar and the Fed’s next move would be the prime drivers of the gold market in the weeks ahead. Speculators are sure to exercise greater caution. Considering various factors, on current reckoning, gold has the potential to decline from the present level, first to $1,475/oz and then to $1,450/oz towards the year-end. Any rise above $1,500/oz will meet with resistance.

Silver has continued to remain more volatile than gold. It has declined below $17.5/oz level in line with its kindred metal. All the speculative talks of the metal racing towards $ 20/oz have evaporated.

The author is a policy commentator and commodities market specialist. Views are personal

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