Gold prices fell sharply after testing all-time highs recently with the market going below the psychological $1,200 an ounce in the international market. The fall erased gains of last several weeks. On Friday, in London, gold PM Fix was at $1,201.50/oz, down from $1,234/oz the previous day. Silver followed suit with Friday AM Fix at $17.98/oz, down from $18.65/oz the previous day.

While mine supplies continue to improve, official sector sales are rising (IMF disposals) and fabrication demand in major markets, mainly India, is weakening. Demand destruction at higher prices is at play. So, from a fundamental perspective the yellow metal may have stepped into a climate of weakness.

A high level of speculative net length too suggests a risk of downward correction. Gold prices will continue to be volatile as external markets are likely to continue to impact the sentiment.

To add to this problem is that contrasting to the strong start to the year, commodity markets displayed certain nervousness last two months. Commodity prices remained under pressure during June as macroeconomic concerns covering global recovery prospects, European debt crisis and sovereign risk, fears of a Chinese slowdown and tightening credit in emerging markets dominated the minds.

Although the G20 meeting generated some confidence about the intention of major economies to contain deficit and work towards better financial sector stability, the overall message was somewhat lukewarm because of a lack of consensus on priorities - fiscal deficit reduction or boosting growth prospects through increased government spending, reports Economic Times.

Concerns about global macro-economy and worries about possible slowdown of Chinese economy are currently haunting the bullion market. In the short-term, therefore, one can expect volatile conditions to prevail with the nature of macro-data setting the price direction from time to time.

However, there is some good news from India. Rising prices of gold and diamonds have not deterred consumers from visiting jewellery shops.

The growth in sales of listed diamond and gold jewellery manufacturers over the past four quarters shows that if anything people have actually stepped up their purchases of precious metals and stones. The market has taken a positive view of the trend as reflected in the steady rise of the share prices during the period.

The eight top diamond and gold jewellery companies recorded a combined turnover of Rs 10,431 crore for the quarter ended March 31, 2010 compared with the preceding three quarters' figures of Rs 8,551 crore, Rs 7,964 crore and Rs 6,832 crore, respectively.

The list includes Rajesh Exports, Gitanjali Gems, Su-Raj Diamonds, Shrenuj & Co, Asian Star Co, Suashish Diamond, Flawless Diamond and Classic Diamonds.

One reason for people buying more jewellery is that India had the highest percentage pay rise in Asia Pacific in 2009 with the average overall salary increase at 6.3%. Indonesia ranked second, with the average overall salary increase at 6%, followed by China and the Philippines with 4.5% and 4.3% respectively.