The price of spot gold (Exchange:XAU=) remained just above a two-month low on Friday morning, as analysts weighed up the many factors that have been causing the commodity to trade in a tight range in recent months.
Gold rose 0.12 percent on Friday to trade at $1,278.60, amid heightening tensions between Ukraine and Russia, but this could prove to be a brief respite with gold watchers predicting a slight fall in the longer term. Before Friday, the metal had been on a five-day losing streak.
"We think in the next few months we'll get some more downward pressure on gold," Matthew Turner, a precious metals analyst at Macquarie Securities told CNBC Friday.
John Meyer, a mining analyst at brokerage SP Angel, agreed and believes that the weakness will persist for gold. He expects the commodity to be range-bound for the rest of 2014. "Yes gold is heading south for now," he told CNBC Friday.
In the 10 years up until last December 2012, gold had surged around 400 percent, with the help of low interest rates, extra Federal Reserve liquidity and concerns over the global economy. In 2013 it lost 30 percent of its value with the Fed beginning to dial back its $85 billion-a-month stimulus program. This year, meanwhile, the precious metal has added 6 percent to its price with a range of factors influencing both speculators and physical gold buyers.
Gold is often seen as a hedge against inflation and traditionally has had an inverse relationship to interest rates, with demand for the precious metal increasing when rates are low. With the Fed delivering a more hawkish tone in the minutes from its latest policy meeting the price has softened.
Turner said that speculators follow Fed policy closely and were willing to buy gold as the price rose but accentuated the fall when the Fed's policy suddenly changed in 2013.
"The investment money has come out of the market," he told CNBC. "What drives speculation is U.S. monetary policy still and last year we had a shock...this year we haven't had a shock"
Continued concerns that violence in Ukraine could escalate rapidly has provided some support for the price which is seen as a "safe-haven" trade. Pro-Russian separatists are currently locked in fierce battles against Ukrainian forces and Turner has dubbed this a "Putin put" which he believes provides a floor for gold prices at $1,200. A put option is a contract which offers the right, but not the obligation to sell an asset at a pre-agreed level.
"We've raised our floor price on the grounds of these geopolitical events such as Ukraine and Iraq, we think it's put a 'put' under the market."
Also on the plus side for the precious metal, Turner believes than when the price falls slightly it spurs buyers in China and India who are inclined to buy physical gold items rather than gold derivatives or paper-based assets traded on exchanges.
However, this tailwind seems to have dissipated this year. In its latest quarterly report The World Gold Council noted that total global gold demand in the second quarter had fallen 16 percent from the same period last year, with demand in top buyers China and India falling about 50 percent and 40 percent respectively.
If physical demand is wavering then the reins may have been picked up by central banks who remain net buyers of the commodity in 2014. Data from the International Monetary Fund 's financial statistics report continue to show that the Russian central bank has been stocking up on gold in an effort to diversify its reserves.
"Would you want to put your funds into U.S. dollars (Exchange:.DXY)?" SP Angel's Meyer told CNBC.
"There's been lots of central bank buying. So that's positive. (Russia is) definitely buying gold, they bought 55 tons so far in the first half (of 2014) and I'm sure they'll be buying more of it, the Chinese too," he added.
- Commodity Markets