Gold prices in the international market have been under pressure for last several weeks, trading well below $1,600 an ounce. Physical demand has been lukewarm, especially in price sensitive markets such as India.

With rates at near record levels there is demand compression in the Indian market. A weak rupee has neutralised all the advantages of the fall in dollar price of the yellow metal.

The global market has been focusing on political uncertainty in Europe, dollar strength and tepid physical demand. For the time being, there is some loss of confidence in gold as a safe haven asset as investors are exiting their long positions and treating gold too as a risky asset.

According to reports, increase in non-commercial (speculative) positions in Comex gold is offset by fresh shorts. Gross short positions are at their highest since September last year while net fund length as a percentage of open interest is only 26 per cent, the lowest since November 2008.

In other words, much of the speculative froth has gone out of the market.

At the same time, gold trade in China is slowing. Volumes traded on the Shanghai Gold Exchange have slowed below the monthly and annual average. The physical market has been affected too. The Chinese Gold and Silver Exchange Society said that Hong Kong's yuan-denominated gold trading volumes slumped 78 per cent from its January peak as sales at jewellery retailers has slowed.

According to wire reports, the president of the organisation said that gold demand in China may stagnate this year. This is bad news for gold bulls because the Asian major has emerged as world's largest consumer of gold. If two of the world's largest markets – India and China – reduce their purchases, one can well imagine the impact on prices.

The current uncertainty in the global markets, the low interest rate environment and long-term inflation concerns should actually be gold-supportive; but the reality is otherwise. Physically backed ETPs are being closely watched. If there is any semblance of sustained outflow, gold prices will come under further downward pressure.

At least for the time being, the prospect of further quantitative easing (QE3) in the US is not bright as macro data are turning positive, albeit at a slow rate. Talk of QE3 may re-emerge if macroeconomic indicators deteriorate. Gold market will continue to face headwinds for some time.

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