LAUNCESTON, Australia (Reuters) - Gold's positive start to the year seems to be based more on hope than any real change to the factors that saw the precious metal shed 28 percent last year.
Spot bullion has gained 4.25 percent since the start of the year to the close of $1,256.09 an ounce on January 28, with China and India factors helping to drive the rally.
The optimistic view for gold is that top buyer China will continue to buy record amounts and that India, which was supplanted by its Asian neighbour last year, will ease the restrictions that crimped its demand last year.
Taking India first, and the gold bulls have taken heart from comments on January 27 by finance ministry officials that the curbs on gold imports will be reviewed by the end of March.
India progressively hiked import taxes to a record 10 percent last year and imposed a requirement that 20 percent of imported gold must be fabricated and exported.
The aim was to cut a ballooning current account deficit, and gold, as the number two import by value behind oil, was viewed the best target given its limited role in creating economic growth.
Initially the gold market had shrugged off the Indian moves, apparently believing that demand in the South Asian nation was so strong it would overwhelm the government's determination to reign in the current account deficit.
However, by the end of last year the measures had worked, with imports being slashed to just 21 tonnes in November. This was in a country that imported an average of about 80 tonnes a month in the year to September 2013.
The hopes for a review of the measures has been sparked by the likelihood that India's current account deficit is expected to fall to about $50 billion in the fiscal year to March, down from the record $87.8 billion the prior year.
However, this misses the point that having achieved some measure of success in bringing down the deficit, the government will be reluctant to allow it to rise again.
It also should be noted that the Reserve Bank of India, which enjoys a fair degree of autonomy from the government, is the responsible agency for setting the rules on re-exporting, and an official there has indicated it's unlikely to review its rules until after the end of March.
The easing of the requirement to re-export would more than likely have a bigger impact on India's gold imports than would cutting the import tariff, but it would seem any decision on this is several months away, and won't necessarily result in a relaxation of the requirements.
Turning to China, and news that the Asian giant imported a record amount of gold in 2013 from Hong Kong, the main transit point for its purchases, boosted optimism that demand in the world's biggest consumer remains robust.
China imported about 1,158 tonnes from Hong Kong last year, almost double the 2012 total, as buyers took advantage of the plunge in prices.
However, Chinese buying may taper once the Lunar New Year holidays conclude early next month.
Retail buyers are likely to have already taken advantage of the lower prices in 2012 and merchants are believed to have re-stocked inventories.
At best, gold demand in China will hold up, but it's unlikely that it will accelerate by much this year.
With Chinese demand likely steady and a large question mark over India, gold will have to rely on other factors to keep its nascent 2014 rally going.
While outflows from exchange-traded funds have slowed, and some small inflows have been recorded, again this looks more like a neutral factor for gold rather than a positive.
The jitters over emerging markets as the United States tapers its quantitative easing may provide some support, but it will also make buying U.S.-dollar denominated gold more expensive for consumers in developing markets, given the likely depreciation of their currencies.
Central bank buying, a key pillar of gold's 12-year rally that ended last year, is also likely to remain broadly supportive, but not so much that it will drive prices higher.
Overall, without rising Chinese demand and a return of Indian buying, it's very hard to see gold rallies as anything other than a selling opportunity.
Graphic of China's gold imports, production:
(The opinions expressed here are those of the author, a columnist for Reuters.) --Clyde Russell is a Reuters market analyst. The views expressed are his own.--
Editing by Ed Davies