Any shift in investor sentiment may result in speculators fleeing the gold market, driving its price down sharply, quickly. One significant risk for gold is a near-term reversal in the dollar, which recently fell to a two-year low.
With the gold price in India climbing a fresh peak on Wednesday, analysts warned investors of a mounting risk of profit-booking.
Silver, which has outperformed the yellow metal since the start of this financial year, is already witnessing high volatility in trade.
In Mumbai's popular Zaveri Bazar, standard gold closed at Rs 52,801 per 10 gram, up Rs 546 from from Tuesday's closing.
August 5 futures of gold on the MCX were trading at Rs 52,980 per 10 gram (until 9.13 pm), up 0.74 per cent.
Internationally, spot gold was trading 0.09 per cent up at $1,959.81 an ounce.
Silver, too, closed in the green - up over 3 per cent at Rs 64,300 a kg.
On the MCX, the metal's September 4 futures were up 0.36 per cent and trading at Rs 65,239.
Globally, the metal was slightly down at $24.21 an ounce.
Investors have been witnessing high volatility in silver trade over the past two days.
The metal had declined as much as Rs 5,693 a kg, or 9.3 per cent, intra-day on the MCX on Tuesday - the second-worst fall in its price in a decade.
However, the metal again jumped 3 per cent from that low.
Comex futures, too, had shed 10 per cent and then surged 7 per cent from the day's low.
Analysts are now expecting similar volatility in gold, saying the near-term risk of profit-booking is high, even as fundamentals remain strong.
Gold, on Tuesday, too, had witnessed massive swings in the international market - it first surged as high as $1,974 an ounce, then declined as low as $1,900 before closing at $1,944.
Metal Focus report stated: “While the price outlook remains constructive for gold, we caution that positioning feels stretched.
"This is evidenced by a significant rise in trading volumes across key commodity exchanges in recent days.
"The wild volatility witnessed on Wednesday also supports our view."
Should the dollar slide show a temporary pause or even reverses, further profit-taking (in precious metals) appears likely.
High volumes on global exchanges, including in China and India’s MCX, also indicate rising volatility.
“The meteoric rise of gold ETF holdings has been instrumental in fuelling gold’s rally, (but) the resulting overhang is a risk.
"Although ETF investors tend to be stickier than those holding futures and forwards, some of these new positions will no doubt be tactical,” Metal Focus noted.
Ajay Kedia of Kedia Advisory said: “Any shift in investor sentiment may result in speculators fleeing the gold market, driving its price down sharply, quickly.
"One significant risk for gold is a near-term reversal in the dollar, which recently fell to a two-year low.
"However, any short-term correction should be viewed in the long-term bullish environment.”
Photograph: Rupak De Chowdhury/Reuters