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Gold traded near a three-week high on speculation demand will be boosted by the Diwali festival in India, the world’s largest bullion-consuming country after China.

Gold’s rally has sputtered on the increasing probability of a U.S. interest rate hike by the year-end. While physical demand in India has been weak, support is seen returning before the festival this weekend and the wedding season. Goldman Sachs Group Inc. says further weakness in China’s currency and investors’ concerns over the outlook for property may spur gold demand.

“Buying from India ahead of the Diwali festival, buying from the Chinese market as the yuan declines, and a general pickup in demand as we approach the U.S. elections” have likely contributed to the gains, Jingyi Pan, a Singapore-based strategist at IG Asia Pte, said in an e-mail.

A slump in prices has given jewelers a glimmer of hope before the Hindu festival of Diwali this weekend and Dhanteras on Oct. 28, the most auspicious day in the year to buy gold. But consumption is still set to shrink to 650 metric tons in 2016, the smallest in seven years, according to a Bloomberg survey of five jewelers and traders. Indians bought 864 tons last year, a quarter of global demand, and a record 1,006 tons in 2010, World Gold Council data show.

About 100 tons of demand were lost in the first half partly because jewelers stopped work to protest an excise tax on jewelry made and sold in the country, according to the Gold Council.

"A recovery in physical demand provided the foundation for the rally that carried over into later trading," HSBC analyst James Steel said in a note. "Gold investors brushed aside the negative impact on bullion of a firmer USD."

Reference: Bloomberg, Reuters