GOLD GAVE BACK its overnight gains as New York opened today. But a bounce in the US Dollar and Sterling left Euro and Yen gold buyers well ahead by the time London closed for business.

   "The downtrend is still intact," said a senior metals trader interviewed by Bloomberg in Chicago. "It's going to be hard for gold to rally with oil remaining a drag."

  
Crude oil earlier fell to $55 per barrel, its lowest point in 18 months. A report due in Washington tomorrow will most likely show inventories of heating oil and diesel rising for a fourth week thanks to very mild weather in the north eastern United States.

  
The Opec oil cartel, meantime, has failed to cut production as sharply as it forecast in October according to Bloomberg. That's left oil vulnerable to over-supply. Further falls in energy prices could tarnish gold's appeal as an inflation hedge.

  
John Reade, precious metals analyst at UBS Investment bank, now expects gold to trade in a tighter range. Physical buying might offer support, but volatility in the broader metals market – especially copper – should cap any short-term gains.

  
Reade also reckons that base metals will come under pressure again this week as the $30-billion Dow Jones AIG fund "rebalances" its holdings. The world's second largest commodity index fund, it's expected to take profits in case prices fall further.

  
Copper has already lost 12% since the start of last week.

  
"The physical [gold] buyers have returned in force," notes SG Corporate and Investment Banking – repeating what BullionVault reported this morning – "but the professional market remains nervous and there may be further volatility in the near term."

  
Volatile prices are great for options traders, but they usually deter physical buyers. In India, for example, the 22-day rolling volatility shows a marked inverse correlation with the month-on-month change in gold sales by value.

  
Now Reuters reports that volatile gold prices in 2006 put a lid on Turkey's private sector demand for gold. Imports stood at 192.7 tonnes against a record 270 tonnes in 2005 – the first fall in volume since 2001.

  
But Turkey's demand is nothing next to biggest gold market of all. India swallowed up one ounce in every five sold anywhere in the world last year. And papers have just been filed with the stock exchange in Mumbai to launch India's first-ever exchange-traded gold fund (ETF) in the next two months.

  
What might India's gold ETF mean for the global gold price? Click here for a full analysis now...