LAUNCESTON: Three months of declines have tested the resolve of gold bulls, but instead of focusing on growth risks in Europe and the United States, they should look at demand in Asia instead.

The case for gold to reverse its recent decline and head toward the psychological $2,000 an ounce level is mainly built on the possibility that Europe's sovereign debt crisis worsens and the United States is forced to implement more quantitative easing in order to spur economic growth.

Adding to the bullish scenario is ongoing buying by central banks, particularly those in developing nations, and increased consumption in China, which looks set to overtake India as the world's biggest gold importer this year.

While developments in the European and US economies are key potential drivers of gold, it's important to note that they don't seem to be driving the price right now.

It's more likely that gold, which has dropped 8.8 per cent from its February peak to trade at $1,633 an ounce, is being more influenced by what's happening in China and India, and here the picture is somewhat mixed.

In China, there is little evidence of a slowdown in actual gold demand, although given the government doesn't formally state its imports; it's always a bit of a guessing game.

What is known is that imports from Hong Kong, the major point of entry for gold shipments, rose 20 per cent in February from January, and the combined figure of 72.6 tonnes represents a sixfold gain on the same period in 2011.

However, it's also worth noting that the monthly imports from Hong Kong are still well below the record 102.5 tonnes in November last year, achieved shortly after the record high price in September.

Still, if the pace of the first two months is maintained for the rest of 2012, China will import about 1.8 per cent more from Hong Kong than it did in 2011, which is a gain but hardly enough to warrant getting bullish about.

Another factor to look at in China is domestic output, which has also been growing strongly.

China, the world's largest gold miner, posted an 11 per cent gain in February output over January to 26.87 tonnes, while total output for the first two months was up eight per cent over the same period last year.

If 2012 output rises eight per cent over last year's, China will  produce about 390 tonnes of gold, up from 2011's 361 tonnes.

It's possible domestic supply may meet much of China's additional demand, and if this is the case, then China may not be much of a factor in driving the global gold price this year.

The World Gold Council, the producers' group, also recognizes that Chinese investors tend to buy more if a rising trend is already established.

Given that gold has been in a declining trend for the past few months, it may encourage Chinese investors to switch to alternatives, such as equities.

The Shanghai Composite Index is up almost 11 per cent since the start of the year, reversing about half of last year's 21.6 per cent decline.

Another China factor to watch is the inflation rate, which has been trending downwards despite rising slightly in March to 3.6 per cent from 3.2 per cent in February.

Despite the increase, inflation is expected to continue to trend downwards from its 6.5 per cent peak in July last year, clearing the way for the government to ease monetary policy to support growth, which may also lessen gold's position as a safe haven for Chinese investors.

Inflation in India, Asia's other large gold buyer, is also easing, but it seems more likely that the depreciating rupee and harder economic times have curtailed buying there.

Gold has gained 5.2 per cent in rupee terms this year and more than 4.6 per cent in US dollar terms. Data after the recent Hindu and Jain holy festival of Akshaya Tritiya, usually a time of strong gold demand, suggest buying was subdued.

Demand at the festival was likely 50 per cent lower at 10 tonnes, according to the Bombay Bullion Association, while a Reuters poll found that India's gold imports are likely to slump by a similar margin to 655 tonnes in 2012 from a record 969 tonnes in 2011.

With Indian demand likely to be tempered, and China's demand likely to show tepid growth, the case for any gains in physical demand seems to rest mainly on central bank buying.

Central banks bought 437 tonnes last year and ANZ Banking Group estimates that if the buying momentum of the first four months of 2012 is maintained, then official sector purchases could reach 600 tonnes this year.

While this would indeed be a bullish factor, central bank buying could equally well ease if the world economy improves.

To sum up, two of the drivers of gold's surge to a record last year - physical demand from India and China - seem to be easing off, while the other, central bank buying, looks solid.