LONDON (Commodity Online): The next potential trigger to drive gold prices higher may be how fiscal policy makers intend to deal with the "fiscal cliff" in early 2013, which leaves gold in the hands of the physical market in the near-term, said Barclays Capital in a research note.

Gold prices had held up well ahead of the FOMC meeting in June, but only temporarily, before they tumbled below $1600/oz, a new low for the month as the Fed decided to continue its programme to extend the average maturity of its securities (ie, Operation Twist) and amid dollar strength and weaker-than-expected macro data.

The policy extension exposed prices to the downside as gold missed the opportunity to re-establish its safe-haven status. Gold failed to gain traction as central banks from three of the largest global economies eased policy.

Indeed in July, after turning its back on its safe-haven status, the risk-on environment proved to be favourable for gold, driving it back toward the $1600/oz mark. But prices appear to be trapped without a catalyst to steer prices higher and a fragile floor. In turn, we have revised our price forecast lower, as gold has struggled with its status, but retain a positive stance, Barclays added.

The British bank also noted that, the physical market remains weak. Appetite in China picked up notably ahead of the FOMC meeting, although not sufficiently to compensate for the continued weakness in demand in India.

India’s demand remains sensitive primarily to the INR price, which has only modestly softened from the peak of a couple of weeks ago, but also the monsoon season. ETP holdings on the other hand remain resilient with the strongest inflows in June since November last year.