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Physical gold demand in India witnessed a surge this week as prices dropped close to 8-month lows. On Friday, gold futures on MCX settled near 46,190 after a sharp drop of about 1,200 this week. After a over 25% surge in 2020, gold prices have corrected sharply this year. So far they are down about 4,000 from the start of the year and as compared to August highs of 56,200, they remain 10,000 lower.

In India, dealers were charging a premium of up to $7 an ounce over official domestic prices, the highest in eight months, Reuters reported. In the previous week, they were charging a premium of up to $5, inclusive of import duty and GST.

"Sales are robust. People are buying coins, bars and jewellery because of price correction," said managing director of a Hyderabad-based bullion merchant told Reuters.

A Mumbai-based dealer said jewellers are keen to build inventory for the festival and wedding season.

In global markets, gold also dropped sharply this week amid a jump in US bond yields. Though gold is seen as an inflation hedge, higher inflation expectations have pushed yields up, increasing the opportunity cost of holding non-yielding bullion.

Many analysts say that gold is likely to attract buying support at lower levels. Gold should still benefit from continued loose monetary policy and low real interest rates this year, they say.

"Rising US Treasury yields and stronger US Dollar has reduced the yellow metal’s appeal among investors," said Kshitij Purohit Lead – International & Commodity, at CapitalVia Investment Advisor.

Nish Bhatt, Founder & CEO, Millwood Kane International, says, "The rising treasury yield is indicative of a recovery in the US economy. The yellow metal has also lost investor's interest as the vaccination drive picks up pace, new cases are under worldwide. Gold prices in India have lost over 10,000/10gm or 18% from its highs witnessed in August 2020. Going forward risk of a second wave of cases, easy liquidity, global economic recovery will guide gold prices."

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