Dubai: Gold may not continue to shine bright.

Gold prices gained more than 20 per cent in the March quarter, registering the best quarter since 1986, but analysts argue that the upside may be limited in the yellow metal going forward.

“Following a year-to-date (YTD) rally, it makes sense that buyers have become more cautious about the prospect for additional short-term gains. This leaves the market exposed to some renewed consolidation and potential profit-taking, especially after the surge in demand last week,” Ole Hansen, head of commodities strategy at Saxo Bank said.

Most of the rally witnessed on a YTD basis was fuelled by dovish stance by the US Federal Reserve, and negative rates from the Bank of Japan, and European Central Bank amid a weaker dollar, which increases appeal of the alternative asset like the gold.

Goldman also expects limited room for further gains in the yellow metal as they expect tightening by the Federal Reserve in September. Its new forecasts put bullion at $1,200 (Dh4,404) an ounce in three months, $1,180 in six and $1,150 in a year, up from $1,100, $1,050 and $1,000, according to a report.

Negative interest rates

Even Jean-Sylvain Perrig, Chief Investment Officer, Union Bank Privee agrees with Saxo Bank’s view.

“If we look at the situation, the FED rate hikes anticipation should not decrease as much, the negative interest rates are priced in, the repositioning is still in place but could be reaching an extreme, Gold has already posted impressive gains but the physical demand is still lacklustre. To that extent, we would argue for some momentum slowing rather than riding the same trend,” Perrig said. He expects gold’s upside to remain limited to $1,350 per ounce.

Total holdings in exchange-traded products backed by gold have jumped by almost one quarter, or 334 tonnes, so far this year. The current total holding of 1,803 tonnes was last seen in December 2013. Hedge funds meanwhile have been almost non-stop buyers of gold futures since last December. This culminated last week in a 27 per cent jump in the net-long futures position to 233,638 lots.

“Going forward, we have Brexit and we do not know which way it will swing either. Then we have another major hurdle, Greece concerns are resurfacing once again as we are going in summer months and this may provide more support for the gold price. Finally, the uncertainty of the US and Spanish elections, both represents a major threat and traders could become risk averse under those circumstances,” said Naeem Aslam, Global Head of Market Analysis, Chief Market Analyst at Think Forex UK Ltd.

Physical buying

The rally in gold prices has not been supported from the physical traders.

Jewellery demand in India, the world’s second biggest consumer of the metal, fell to its lowest level in seven years at 88.4 tonnes in the first quarter, while total demand slumped 39 per cent from a year ago to 116.5 tonnes, according to WGC data.

Indian jewellery sales have fallen since the start of the year, hit by higher gold prices and delayed purchase decisions by consumers who had hoped for a cut in India’s 10 per cent import duty on gold in the national budget.

“While investment demand has remained strong throughout, we are beginning to see fading demand in the physical market. Industry officials in India have estimated that gold demand during the annual Hindu and Jain holy festival of Akshaya Tritiya on Monday was down by one-third from last year,” Hansen said, adding that this might act as a negative to gold rallying gold prices.