Gold continued with its range bound consolidation during the last month. Dollar continues to be the dominant factor influencing gold prices with both moving inversely to each other maintaining its long run historical relationship. Economic indicators in the U.S and Europe, developments on the sovereign debt crisis accompanied by the economic and political changes in Euro region and the "The Bernanke Factor" - the comments and criticism unleashed by Fed; all led to the volatility in the dollar value and thereby causing swings in gold as well.

Gold traversed in a tight range between $1680 and $1610 during the month; closing almost flat in dollar terms. Indian Rupee has been depreciating considerably off late leading to significant gains in gold denominated in rupees.

The markets continue to work on a perverse logic where weak data is construed as positive. Weak economic data is seen as an indication that the Fed would continue with its accommodative stance and increases the probability of further quantitative easing aka money printing by the Federal Reserve in a bid to prop up the economy. This logic is also well supported by the Fed chairman Ben Bernanke as he repeatedly affirms that all available policy tools are still on the table signaling that he does not rule out the possibility of further easing if economic conditions deteriorate. The probability of further easing is what is keeping dollar under check despite the worsening of situation of the peripheral nations in the European region and the monetary injections in form of LTROs undertaken by the ECB.

The strength in the dollar is not by its own merits. It is aided by the weakness in the Euro which is weighed under pressure from the increasing severity of the sovereign debt crisis and deterioration in the economic health of peripheral nations that show no signs of improvement. The ECB has been trying to paper over the issues facing the PIIGS countries but is far from achieving any meaningful solution to the crisis. Its only pushing the can down the road and aggravating issues for the future. The fundamental flaw behind the Euro project is not being addressed not realizing that the union in the current form cannot survive for long. The dollar can benefit further on account of weakness in the Eurozone and any bit of positive economic news in the US will help its rise. However, the possibility of further easing will keep it under check. Any strength in the dollar value will also keep gold under check unless we see the crisis in Euro zone aggravate significantly.

There had been some speculation concerning slowdown of the yellow metal purchases from china on account of slowing growth prospects. Contrary to the same, china's appetite for the noble metal shows no respite. Gold imports by China increased as rising incomes and concerns about inflation boosted purchases. Shipments were 72,617 kilograms in the first two months, compared with 10,564 kilograms a year ago, according to Bloomberg calculations. GFMS expects China's jewelry fabrication to rise to a new high in 2012 after jumping 15 percent to a record 496 tons.

On the other hand, demand from India has slowed down considerably. There have been a series of distractions hampering demand. Earlier, it was a conscious attempt on part of government aimed towards discouraging consumption by way of increasing levies over and above gold prices. This was followed by a prolonged strike by the jewelers across the country protesting the harsh moves by the government. Despite the end of strike, demand has not much recovered on account of continuous increase in rupee denominated gold prices buoyed by depreciation in the Indian currency. However, it still doesn't seem to be a longer term worry as there have been patches where demand dries down and recovers on any decline in prices or as the sentiment towards gold prices becomes more positive. The buying from Indian market would likely see recovery from here on and could be accelerated if we see some price corrections in the rupee denominated gold price.

Global gold demand saw a small uptick during the last year rising by only 0.6 percent on the back of central-bank buying that help offset declines in fabrication demand. Central banks boosted net purchases almost sixfold to 455 tons last year. GFMS expects that central banks would likely continue to buy about 100 tons each quarter in 2012 as emerging countries maintain a similar rate of purchases and sales from Europe remain tiny. Total investment fell 10 percent to 1,605 tons last year, but gold bar demand continues to climb by 37 percent to a record 1,209 tons.

Investment demand continues to slide whereas central bank buying continues to increase. In the first quarter, gold and silver coin and bar sales from the Perth Mint totaled 2.16 million ounces compared with almost 3.7 million a year earlier, according to mint data. Sales of gold coins from the U.S. Mint were 62,500 ounces in March, 15 percent lower than a year earlier. Whereas, central banks continue to snap up their bullion purchases. Mexico added 16.8 metric tons of gold valued at about $906.4 million to its reserves in March and also nations including Turkey, Russia and Kazakhstan increased their holdings of the metal, International Monetary Fund data show. Turkey added 11.5 tons, Kazakhstan 4.3 tons, Ukraine 1.2 tons, Tajikistan 0.4 ton, and Belarus 0.1 ton, according to the IMF. The data shows Russia also boosted its gold reserves by about 16.5 tons. We expect that the recent trend of the official sector being a net buyer will continue in the medium and long term as our expected theme of diversification of reserves and investments into gold continues to unfold.

There could be short term volatilities on account of a multitude of factors operating currently; the economic and financial background continues to be positive for the yellow metal. While its been challenging times for the yellow metal as dollar strengthens (thanks to weakness in the Euro) and amid concern about demand in the top physical markets, India and China. However, the possibility of further quantitative easing will likely support the metal. Given the policy mindset, it is too soon to dismiss the possibility of further quantitative easing in either the United States or Europe, and the Chinese government may yet ease its monetary policy.

Whenever gold sells off, we see buying emerge to take advantage of lower prices. This is a pattern we've seen consistently and we expect it'll continue until either of the financial, economic or geopolitical concerns prevailing in different parts of the globe aggravate.

With tensions in the Eurozone resurfacing, uncertainty is coming back. This is helping to build a good foundation. In Europe, for instance, Spain is becoming a real worry and it's much larger than Greece. Concerns the Eurozone may be unable to subside the brewing potential problem as easily as it did in Greece. The political developments in the Euro zone countries may aggravate the crisis further.

The global economy is shrouded in various uncertainties. The long term issues of rising deficits and debts are still in want of some meaningful resolution. The western world is still grappling with a massive and unrealistic heap of sovereign debt. These high levels of debt, combined with slow economic growth have compelled central banks around the world to ‘print’ more dollars (and other currencies), stimulate the economy and inflate away the debt burden with an intentional plan of currency devaluation.

In the light of these macro events, gold appears to remain favorable, as an effective portfolio diversifier.

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