Gold futures traded up 1% to end at $1,669.3 last Friday and went up another 0.6% to end at $1,679.70 on Monday in line with other commodities’ rally and dollar decline. Europeans agreed to further increase the size of their rescue fund while economic news from China and the U.S. appeared better. The March U.S. ISM’s factory index rose 1 point to 53.4 while the China’s PMI reached a one-year high of 53.1, both beating market expectation. Unsurprisingly, the Eurozone’s manufacturing PMI remains in contraction at 47.7 in March.

On Tuesday after the release of the 13 March FOMC meeting minutes showing that QE3 is unlikely in the short-term unless economy falters or inflation falls below the 2% rate, gold futures plunged from the open at $1,679 to an intra-day low of $1,640.2 before rebounding to around $1,648 during Asian early hours on Wednesday. Gold futures essentially plunged to the level seen after the conclusion of the FOMC meeting on 13 March.

Physical demand did not help. India’s Bombay Bullion Association reported that March gold imports were only 15 to 20 metric tons versus 75 to 80 tons in March last year owing to the jewellers’ strike which lasted more than 18 days. The jewellers would not end the strike unless the government removes the 1% levy on unbranded gold ornaments. Gold imports into Turkey also fell by 57% year-over-year to 7.2 tonnes while Shanghai’s latest gold volume traded remains below the monthly average, reported by Barclays.

Given this backdrop, gold has actually done well hanging above the $1,600 level, reflecting that the underlying long-term demand for gold has not been shaken. According to Bloomberg, investors’ demand for gold-backed ETP products was still high at 2,396.5 tons as of 30 March, within 0.6 percent from the highest level reached. European central banks continue to hold on to their gold. A long-term real interest rate chart in the U.S. shows that real rates below 2%, a level not to be breached any time soon, has been supportive of rising gold prices. The Fed governors in fact expressed that unemployment rate is still above while inflation is below their long-term objective, indicating uncertainty on U.S. recovery abounds; hence Bernanke is not ruling out any options to stimulate the economy.