Bullish gold bets look misplaced: Russell

But for these bets to pay off,two things need to happen.

Firstly,a replay of the crisis that sent spot gold to a record 1,920.30 an ounce last September,in the form of worsening sovereign debt woes in Europe and a weakening U.S. economic outlook that leads to a fresh round of quantitative easing.

Secondly,demand in Asia and from central banks would have to hold up and even increase to allow the physical gold market to underpin the gains being made in the paper market.

Looking at the first factor,while there is little doubt that the economic outlook in both Europe and the United States has darkened in recent weeks,is it yet as bad,or likely to become as bad,as during the months leading up to gold8217;s record high last year?

The base case for Europe is a continuation of the muddling along scenario that has been the status quo since the onset of the global financial crisis in 2008.

This means that the Europeans take just enough action just in time to stave off a complete crisis,but not enough to solve the underlying problems.

The recent Greek elections illustrate this way of doing things,with the Greek voters marching up to the abyss of a chaotic departure from the euro,and then pulling back from the immediate crisis while leaving the big issues still largely unresolved.

However,it8217;s instructive to note that not even all the concern over Greece and a disintegration of the euro zone could provide much of a boost to gold,which has traded in a range of about 50 either side of 1,600 an ounce for most of the past two months.

The U.S. dollar has been seen as a safer place to park assets in the latest European upheavals,which normally doesn8217;t bode well for gold.

Gold bulls are probably hoping that the U.S. dollar will weaken if the Federal Reserve does go for another round of quantitative easing in a bid to boost the economy,but so far the central bank isn8217;t biting and its recent commentary suggests it would rather do a so-called QEIII as a last resort.

That leaves Asia and central bank demand as the best drivers of the gold price,and indeed,it does appear that China is buying more of the precious metal.

Since China doesn8217;t report gold trade,the picture is always incomplete,but net flows from Hong Kong to the mainland jumped 67 percent in April from the prior month to 67.4 tons.

Hong Kong is the major conduit for imported gold into China and exports to the mainland have been rising strongly in the first four months of 2012,but have yet to scale the peaks achieved last year in the months either side of gold8217;s record high in September.

If the pace of imports in the first four months is maintained over the rest of the year,China could take 500 tons from Hong Kong,a 32 percent hike on the 380 tons it bought last year.

The World Gold Council expects China to overtake India as the world8217;s major gold consumer in 2012,and figures from the producer group showed demand rose 10 percent in the first quarter.

If maintained,that implies 80 extra tons of gold demand in China this year,although the Hong Kong figures suggest it may be slightly more than this.

It8217;s also a small point,but China8217;s domestic gold output is increasing,up 6.1 percent in the first four months of the year to 109.6 tons,a rate that if maintained will add about 25 more tons of supply this year in China,not a huge amount but this is gold that won8217;t have to be imported.

Even if Chinese demand does surprise to the upside,it8217;s unlikely to be enough to offset declining demand in India.

Council data show that demand in India dropped 29 percent in the first quarter,or by 83 tons.

That means that the slump in India in the first quarter may have been as large as the expected whole-year gain for China,which is definitely not a bullish gold signal.

While Indian demand in the first quarter was affected by a weak rupee,new import taxes and a jewellery tax,it8217;s unlikely it will bounce back strongly.

The jewellery tax was scrapped,but the rupee remains weak and the Indian economy isn8217;t as robust as in previous years,which may discourage people from spending on gold.

In fact,gold imports by value fell by 6.2 billion in the first two months of the Indian fiscal year that started in April,according to Finance Secretary R.S. Gujral.

At the current gold price around 1,571 an ounce,that would equate to a drop of about 112 tons of gold imports over April and May,which would indicate no recovery at all in Indian demand.

That leaves central bank buying,which leapt almost sixfold in 2011,a growth rate unlikely to be repeated,with steady demand a more likely scenario.

Taken together,what this means is that the bullish gold case is based on a certain set of circumstances eventuating,while the bearish to flat case is built more on factors already in evidence.

Clyde Russell is a Reuters market analyst. The views expressed are his own.8211;