Demand back as gold retreats to Rs 7650

The price drop was due to the Fed's decision to raise rate by 25 bps

Physical demand for gold was back in the domestic market as gold prices softened in tandem with the fall overseas. Spot gold (of .995 purity) traded at Rs 7,650 per 10 gm today as .999 purity gold was around Rs 7,900 per 10 grams.

"Today, Mumbai saw spot trading of about 300-400 kg of .995 gold. Prices are likely to remain weak and touch about Rs 7,000 per 10 gm level," said Suresh Hundia, a bullion trader. Demand for gold in the spot market had choked with prices rising to higher levels.

Buying by funds, largely Japanese, led the yellow metal to near new 24-year high at $540 an ounce, earlier on Monday.

Overseas spot gold fell $8 an ounce from yesterday's close to $512.50 in Asian trading, before rebounding to $515-level. The fall was largely due to the US Federal Reserve's decision late last night to raise interest rate by 25 basis points to 4.25 per cent 14th time in a row, which has helped the yen recover against the greenback.

Market players consider today's downward movement in gold prices as a "healthy correction" which will help it gain momentum in the upward movement. Following the recent impressive gains and as the year-end is approaching, the weakness of the past several sessions more closely resembles profit taking and a short term correction before the larger uptrend resumes.

"As a result, we expect more two-way activity in the weeks ahead as volatility dries up. The highs of yesterday at $540 should cap the upside, while support comes in at $506/510," said an analyst with UK-based Barclays Capital.

A segment of the market is now favouring the yen-gold relation following which every one-point appreciation in yen against the US dollar, gold should fall by US$ 15 an ounce.

"If observed closely, gold has been following the yen closely since November and this has also negated the yellow metal's inverse relationship with the US dollar. For example, if the yen is supposed to see 118 to a dollar in the days ahead, then one can expect gold to see $472-475 an ounce level," said a top bullion analyst.

Overall, the market remains bullish on gold in the medium-term and technically, the next major target is likely to be $550. "Bullishness in gold is expected in the medium term following inflation fears and rising fuel costs with a cold winter ahead in the west. These support gold's status as a safe haven investment vis-a-vis currency," said Si Kannan, an analyst with Sharekhan Commodities.

Weakness in gold has also pulled down other precious metals, with silver falling to a fortnight low and platinum to three-week low Silver fell to $8.41 an ounce from yesterday's $8.52.

Platinum was down to $ $973 an ounce, down from previous close of $991. Palladium fell to $ 265 an ounce from yesterday's $273.