Gold has staged a big comeback in the recent weeks, rebounding over 13 percent since hitting a near three-year low late June, raising the question of whether investor sentiment toward the embattled precious metal is about to shift yet again.
The metal, which traded close to a three-week high of $1,336 on Tuesday, has been supported by short covering and robust physical buying especially from China. Latest data from the China Gold Association (CGA) on Monday showed that the country's gold consumption rose 54 percent in the first half of the year, compared with the year-ago period.
Separately, in a sign that investment demand may be returning, holdings in the world's largest gold ETF SPDR Gold Trust rose by nearly 2 metric tons to 911.13 metric tons on Friday, representing the first increase since June 10.
(Read more: Pro: Three reasons gold will hit $1,600 by year-end)
"There is a clear conflict between physical and speculative demand right now, but as things stand, China's buying spree has been the bigger influence right now and has driven leveraged funds to cover shorts," said Chris Weston, chief market strategist at IG Markets, adding that if gold moves above $1,348, it could test the $1,370 level and then $1,400.
Citing tighter supply in the physical market, Barry Dawes, head of resources at Paradigm Securities, said there's a strong case for buying gold.
"The physical demand for gold is robust and we're seeing premiums in Asia that you don't see in other parts of the world," Dawes said. "The physical market for gold is now really tightening up and the shenanigans being played by hedge funds and bullion and investment banks may just be coming to an end."
Victor Thianpiriya, commodity analyst at Australia and New Zealand (ANZ) Banking Group, who sees gold ending the year at $1,300, disagrees that the physical market will face any meaningful tightness in the near-term, noting that a slowdown in Indian consumption will free up some supply.
India imported $2.9 billion of gold and silver in July, down a third from the same period a year earlier, according to Reuters.
Watch out for tapering
Another headwind for gold, according to some gold bears, is the Federal Reserve's scaling back its monthly bond-buying program, which will likely result in higher Treasury yields, dampening the attractiveness of gold—an asset that pays neither interest nor dividends.