Gold is struggling to find near-term support from external drivers despite the positive backdrop of low interest rates and global balance sheet expansion, according to UK-based Barclays Capital.
Gold hit a six-month low of US$1,612.25/oz on the London Bullion Market on Friday and fell further to close at U$1,610.75/oz on Monday.
The absence of the Chinese market for the one-week new year holiday, combined with technical selling were the main reasons for the drop, according to Barclays. Demand from India also softened.
The price correction should spur interest, although if physical demand fails to respond, "the floor for prices is set to become increasingly fragile," Barclays analyst Suki Cooper wrote in a note.
"The soft start to the year has permeated into February and ETP flows remain negative at 7t. Total holdings are still close to record highs and broadly stable, but net redemptions gathering pace are the key downside risk to prices," Cooper added.
The Bombay Bullion Association reported an increase in gold imports of 23% year-on-year in January to 100t, which is an 18-month high. The World Gold Council (WGC) reported in its gold trends report that demand fell by 12% in India last year. However, 4Q12 was the strongest quarter for jewelry demand since 1Q11. Chinese demand is also expected to remain strong, according to the WGC.
Barclays also expects the Federal Reserve to continue its "highly accommodative policy" in the US which is supportive for gold.
The bank is maintaining its average price forecast of US$1,710/oz in the first quarter and an average of US$1,778/oz for 2013.