Gold briefly dropped below $1,630 last week before rallying towards $1,696 this morning. Our view from the start of the month remains unchanged: we continue to believe that a gold price at $1,630 provides good value.

There is valid concern over Indian gold demand which may decline on the back of higher domestic taxes on the gold industry. Indian buying has been notably weak as the strike by jewellers drags on for the eleventh day today. But while Indian demand is an important source of physical demand, focusing only on Indian demand paints the wrong picture. Despite what seems to be a more general market belief, demand in Asia (ex India) has been quite strong in recent days, particularly South- East Asia.

Our Standard Bank Gold Physical Flow Index (GPFI) has shot higher as demand from South-East Asia in particular increased with gold below $1,650 over the past few days, no doubt providing support to the gold price when investor sentiment turned bearish. Our GPFI tracks actual physical gold flows (that Standard
Bank sees) ' much of these flows are into Asia and India. An index value below zero indicates that the physical market is a net seller, while a value above zero indicates that the physical market is a net buyer. The greater the index value (in absolute terms), the stronger the buying/selling forces.

As pointed out before, the behaviour of the physical market does indicate that this segment of the market is price-sensitive. The general trend is fairly consistent: when the gold price moves lower, physical demand rises. When the gold price rises, physical demand falls away. This time round is no exception. The physical market is still buying dips, even if India is absent. This leaves two questions: Firstly, at what price will physical demand fall away? We do believe that buying appetite could be substantially weaker above $1,700. For example, already we are seeing the SGE gold premium in Shanghai declining since yesterday ($4.50 today vs. $7.50 yesterday).

Secondly, will Indian demand improve ahead of the Akshaytritya festival in late April? This festival is the secondlargest gold festival in the country. We do believe that demand will improve from current levels, especially after missing a good buying opportunity last week. This implies that India may support the market at higher prices than would otherwise have been the case. As a result, physical demand might be slightly less sensitive to price action over the next two weeks.