Lower demand for gold leads it to trade downwards

Recently traders and analysts projected a rather bearish outlook for gold for August, as two main expectations - a rise in inflation and a surge in Indian demand for jewellery - appear to be waning.

The major two reasons responsible for lowering demand of gold are shrinking of monetary base - the supply of money in the economy by the US Federal Reserve - and bad Indian monsoon.

Since India is the biggest importer of gold from Dubai, gold traders in Dubai sound all the more bearish since bad Indian monsoon means that less people will save enough to buy gold in the agriculture-dominated economy.

Gold, which was priced at $954.10 an ounce as per the latest data, is expected to plunge down to a range of $900 to $905 an ounce.

Tom Pawlicki, a precious metals analyst at MF Global, in a new report, said: "The gold market is expected to trade in a downward direction in August, with prices retesting the $900 level. Fundamental conditions deteriorated in July and that gold prices will have difficulty in maintaining any kind of strength."

Earlier this year, the demand for gold increased due to safe-haven and inflation, which have disappeared now.

Mr. Pawlicki said: "The Fed has begun shrinking its monetary base and is winding down its section 13.3 programmes designed to alleviate systemic risk. Inflation hawks were bullish gold earlier this year based on fears that expansion of the Fed's balance sheet would lead to increases in the money supply."

He concluded: "The meager outlook for inflation has caused liquidation in ETF holdings, whereby the SPDR fund has seen 61 tonnes withdrawn since peaking in early- June 2009. Finally, physical demand has been disappointing."