(Clyde Russell is a Reuters market analyst. The views expressed are his own)
By Clyde Russell
SINGAPORE Gold bulls have had precious little reason to cheer in recent months, with the yellow metal hitting a six-month low last week, but there have been some encouraging signs on the demand-front recently.
Renewed buying by India and China, which together account for more than 40 percent of physical demand, has lifted some of the gloom that saw spot gold drop below $1,600 an ounce on February 15.
But before bulls can get too excited, the question remains as to whether the rebound in demand in the two Asian giants is sustainable, and whether it's enough to offset downward pressure from elsewhere.
India's gold imports surged 23 percent in January from a year earlier to 100 tonnes, the highest in 18 months, according to the Bombay Bullion Association.
This added to the 41 percent jump in Indian gold demand to 261.9 tonnes in the fourth quarter of 2012 from a year earlier, according to figures from the World Gold Council.
However, both the gain in January and the fourth quarter can be partly explained by buyers stocking up ahead of an increase in the gold import tax to 6 percent from 4 percent, which came into effect on January 21.
This means Indian gold imports may decrease in coming months, and the bad news for the bulls is that the government appears determined to curb demand in order to lower the current account deficit.
So if gold imports don't moderate, the government is likely to take further action to ensure they do, meaning that at best India's gold demand may remain steady to only slightly higher.
There is also a change that allows Indian gold investment funds to hold 20 percent of their bullion in bank deposits by consumers, a move that may cut demand for imported gold by these funds, although the tonnage is likely to be low.
China's gold appetite was largely steady in the fourth quarter, rising slightly to 202.5 tonnes from 199.6 tonnes in the same period in 2011, according to council data.
Over the whole year, Chinese demand grew 1 percent, while India's dropped by 11 percent, numbers that help explain why gold prices rose only marginally last year, and once again disappointed calls by many gold analysts for a rally to new record highs.
But China's jewellery sales rose strongly for the just-completed Lunar New Year holidays, jumping almost 40 percent from the same period a year earlier in a sign that consumer demand in the world's No. 2 buyer may be staging a comeback as economic growth regains momentum.
It's still too early to say that Chinese demand will rise significantly over 2013, but the risks for an increase seem higher currently than the risks of a decline.
But even if Indian demand holds up and China's gains, will it be enough to offset negative influences elsewhere?
GRAPHIC of world gold demand trends: link.reuters.com/vex85t
It appears western investors have largely fallen out of love with bullion, with holdings in exchange-traded funds declining 1.4 percent since the record set in December.
While this is still a relatively modest drop, the exit of high-profile investors like George Soros from gold may weigh on sentiment, especially if prices remain becalmed.
A further sign of waning investor appeal is the slashing of net-long gold positions by hedge funds and money managers to the lowest in more than four years, according to the latest Commodity Futures Trading Data.
While long positions still outweigh shorts by 2.4 times, short positions have been rising while longs have been dropping.
Strong gains in equity markets and modest increases in bond yields have also weighed on gold's investment appeal.
What may be happening in bullion markets currently is a rotation of influences.
Last year gold was weighed down by weak physical demand in India and China and supported by investment flows and central bank buying.
This year it appears gold may be supported by a recovery in India and China, but hampered by a loss of investment appeal and a stronger U.S. dollar.
What is the same is that it's still hard to construct a comprehensive argument that gold prices should rally, or one that they should decline, meaning the range-trading of recent months may continue.
(Editing by Joseph Radford)