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A week in gold: On the backfoot as good run ends

After a brief spike following the Brussels attacks, gold slid to around US$1,220
Lower as interest rate uncertainty returns

The drop in the gold price this week was a sharp reminder to anyone who believed the metal has decoupled from the dollar to think again.

After a brief spike following the Brussels attacks, gold slid to around US$1,220 after its worst week this year.

A fortnight ago it had been in touching distance of US$1,290.

Gains for the dollar on the prospect of a surprise rise in US interest rates were blamed.

Atlanta Fed president Dennis Lockhart started the ball rolling with a suggestion that US interest rates may rise as early as the next Federal Reserve meeting.

Philadelphia Fed President Patrick Harker echoed the comments the next day and said a rate rise next month should be considered, while Charles Evans, Chicago Fed President, added he expects two more rate rises over the course of 2016.

Whether this amounts to anything more or less than the Fed said at its last meeting was not clear.

But according to James Chen at spread bet firm City Index, the comments from the trio were enough offset the surprisingly dovish last meeting of the Federal Reserve.

Rising interest rates lead to an increase in demand for the dollar and as gold is denominated in dollars, there exists an inverse correlation between the two, he said.

From a technical perspective, Chen adds gold could have further to fall if it breaks down below the current support levels, though Friday it was holding its own a couple of hours into US trading.

Gold is still having to do without any support from consumers who for various reasons seems to have deserted the metal this year so far.

Switzerland's gold exports fell to an 18-month low in February with shipments to India, China and Hong Kong all well down on the previous month.

Indian and China are by far the largest consumer markets for gold jewellery and god bars and coins.

A strike by Indian jewellers after the surprise sales tax announced in the Budget has not helped, but a compromise may be reached with the industry calling off its action while the tax office has said it will go easy on collecting the money for the next 60 days.

The upsurge in buying from institutions and professional investors through exchange traded funds (ETFs) has been a prime reason for gold’s strong performance in 2016, but between them China and India account for over 40% of demand.

If the gold price does dip further, consumer demand may be critical to prop it up say some analysts though the good news is that consumer demand has proved very price sensitive over recent years.

Gold was trading at US$1,220 shortly after US trading got underway on Thursday, down about US$38 on the week.

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