Prices of precious and base metals have been dropping for the past few days and analysts predict a further fall before they firm up. Gold last traded at $1,131.25 an ounce, down 11.25 per cent from the previous day's close.
Analysts blame short-lived dollar dollar and lackluster demand for the fall in prices, but the most immediate reason, particularly for the rise in gold prices, has been an order from the Chinese central bank that instructed banks in China to strengthen their reserves.
"The immediate reason for the rise in gold's price has been the order from the People's Bank of China. As a result, the Greenback slightly strengthened on Friday (the last trading day), and therefore, gold fell," said Sajith Kumar PK, CEO, Dubai-based JRG International brokerage DMCC.
Sajith said if gold falls further and remains below $1,127 an ounce for two trading days it could fall to further lower levels of $1,118 an ounce. "Gold would certainly rise later on, but then a short momentum of lowering prices could keep prices lower this month," he said.
The dollar, which has started to weaken again, could also firm up gold's price, he said. Surprisingly, gold had been rising not very long ago and though analysts talked about the lack of demand, none predicted a sharp fall in prices. Dun&Bradstreet, a US-based energy information provider, said prices gained ground during the week as the dollar weakened against rival currencies.
The yellow metal also got physical buying support from markets such as India.
Weak economic data from the US further encouraged safe haven buying for gold.
Jeffrey Rhodes, CEO, INTL Commodities DMCC, said in his report that the price of silver, the other actively traded precious metal, will also depend on the Chinese influence. "The 10 per cent price increase in 2010 (price of silver) has been driven by increased optimism about China, which has now become the world's largest market for auto and truck sales. The news from China could have a significant impact on sentiment and on the charts there is a lot of room on the downside," Rhodes said. Silver last traded at $18.22 an ounce – lower than the previous day's close.
The prices of two of the largest traded base metals copper and aluminium also came down due to a dearth of demand. But they are expected to firm up as an improving economy drives demand this year.
"Prices of metals are expected to rise as demand firms up," Sajith said.
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