Gold prices rose to a two week high on Wednesday amid heightened uncertainty surrounding the timing of the US Federal Reserve’s interest rate hike. Demand from China and India – the two biggest consumers of the metal – has also helped turn the negative tide. This is evident from the fact that Chinese local gold prices are currently pegged at an approximate 2.00% premium above global spot gold prices.

Dollar Weakness Feeding Gold Surge

The US dollar is still modestly weaker after the recent rally, pulling back from a seven month high against a basket of major currencies after US consumer prices pointed to a moderation in core inflation. Besides raising questions about the likelihood of a December rate hike, gold’s high degree of sensitive to interest rates means that increased uncertainty on that front is also helping stabilize bullion prices.

However, the recent uptick in bullish sentiment may not last too long, with the short-term gold outlook still relatively downbeat. By all accounts, the US dollar will strengthen going into the fourth quarter, as an election victory for Hillary Clinton looks increasingly likely and dollar funding shortage across Europe could see demand pickup. Furthermore, despite the mixed signals, the Federal Reserve will find it difficult to let the whole year pass without a single rate hike, especially with employment and inflation trending closer towards the Central Bank’s targets.

Physical Demand Deceleration

On the demand front, consumption in China and India are projected to decline next year. The two countries account for more than half of the world’s bullion consumption according to figures from the World Gold Council. Nevertheless, as China grapples with a volatile economic recovery, demand may falter. As for India, the proposed imposition of a goods and services tax from next April is bound to hurt savings and consumption, a development that may also lead to a decline in gold purchases.

Gold prices have managed spectacular gains over the last year, rallying 25.00% during the first half of 2016 after three straight years of losses as investors sought refuge in the safe haven metal.Pervasive concerns that the massive bond buying programs from central banks across the globe were failing to revive economies has been a key demand driver. However, after reaching July highs in the aftermath of the Brexit referendum, institutional investors have become reluctant to commit to long positions amidst the growing strength in the dollar.

Having said that, though the medium-term outlook continues to remain bearish, there are far too manyfinancial and geopolitical risks to allow gold from sliding much further from current levels. Additionally, if the Fed decides to hold back from further monetary tightening in at least the first half of 2017, it would not be surprising to see a resumption of the bull market that began earlier in the year.

Technical Momentum Needs Further Confirmation

Gold entered into a technical bull market after forming a base around $1050.00 per troy ounce in December of 2015. The subsequent rising peaks and valleys of pivot highs and lows confirmed the shift in long-term trend from downwards to upwards. Every recent dip in prices saw new buyers enter only to push prices higher. 

The rally gathered steam by the start of this year until gold formed a peak close to $1375.00 during July. As prices subsequently failed to break through the high, bullion entered into a consolidation range, with $1310.00 as the floor. Until that support was intact, the bull trend was still in play.Market sentiment has convincingly reversed negative since gold broke below the key $1300.00 support zone late last month. The metal has formed a near-term bottom at $1250.00, with the rally this week confirming that buyers are slowly remerging.

Although gold is likely to rise towards $1275.00 in the coming sessions and weeks, for any meaningful rally to materialize, prices need to paint a daily close above $1280.00 while closing the 200-day moving average which is acting as resistance. Until that occurs, the prevailing trend remains downwards, reducing the bullish case for the precious metal.  On the downside, a break below $1250.00 could see bears regain control and momentum lower accelerate towards $1200.00.

Looking Ahead

While gold remains stuck in a range between support at $1250.00 and $1280.00, there are several factors that could dislodge the horizontal price action.For one, stronger US economic data could see the Dollar accelerate to the upside, pressuring gold prices lower.If interest rate speculation continues to rise and increases arrive, the value of holding gold as a non-yielding asset will continue to be diminished over time. 

Should rate hike speculation die down, gold may have the perfect backdrop for near-term gains on the back of sustained uncertainty on a global scale.Robust demand for physical bullion may be enough to support the bull market over the medium-term, but if longer-term shifts materialize in demand from China and India, the case for holding gold may continue to decline.