The precious metal is widely seen as a haven asset, however the US dollar is also a contender. The US dollar strengthened on Wednesday to a one-week high against a basket of major currencies.
Gold rose 1 per cent after news of the attacks in Belgium on Tuesday, touching $1,260 a troy ounce.
“While gold usually rallies in these situations, it generally does not hold on to initial gains,” said Jim Steel, an analyst at HSBC. “For gold, much may now depend on the level of perceived risks going forward and the US dollar’s performance.”
Gold has benefited this year from the bond market indicating the US Federal Reserve will probably implement just one increase in borrowing rates later this year.
Last week, Fed officials lowered their own forecasts for policy tightening during 2016 from four interest rate increases to two upward shifts. However, markets are following the debate among officials as US inflation has pushed higher in recent months. Philadelphia Fed President Patrick Harker said on Tuesday that the US should consider raising rates as soon as next month.
Gold investors are concerned the Fed may well surprise markets and raise interest rates in the coming months, which can be negative for gold buyers as the metal provides no yield.
“Such a reaction reflects a long-held view: higher rates and US dollar strength weaken gold prices, while the opposite strengthens them,” analysts at UBS Wealth Management said.
ETF buying is still strong, with assets rising 0.2 per cent to 1,766 tonnes on Monday, according to data from Bloomberg, the highest level since March 2014.
Still, there remains little pick-up in physical demand for gold in the main consuming nations of India and China, which could cap gold’s prospects.
Switzerland’s exports of gold totalled 93.1 tonnes in February, the lowest monthly volume since August 2014, according to Commerzbank. Exports to China, Hong Kong and India fell more than 40 per cent compared with the previous month.
Gold is often sent from vaults in London to Switzerland to be refined into smaller kilobars for the Asian market.
“In our view, what remains critical is whether physical demand responds and supports gold, amid any sharp price corrections,” analysts at Standard Chartered said.
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