Updates with further commentary starting in seventh paragraph.

Chicago--(Kitco News)--Gold prices retreated Friday as weakness across financial markets and a stronger U.S. dollar lent weight on renewed worries about deflation and weakening global economies, but next week’s outlook is generally favorable to the yellow metal.

Although gold rallied Thursday to seven week highs following poor U.S. economic data regarding jobless claims and manufacturing, Friday eventually saw prices retreat as financial markets racked up losses.

George Gero, vice president with RBC Capital Markets Global Futures, said the losses in gold stem from “get me out for the weekend selling.”

“Indecision and uncertainty prevail,” he said, citing news reports that Goldman Sachs is telling wealthy clients to ease up on gold days after saying it sees gold rallying to $1,300. Despite positive economic news about Germany Thursday, a European Central Bank council member said the central bank should keep its current stimulus measure for the rest of 2010 because of a weak euro zone economy. That weighed on the euro.

Dennis Gartman, in his eponymous newsletter, The Gartman Report, said while gold saw initial strength, the buying interest comes from worries. “The economic news is not gold bullish. It is, if anything, gold bearish, for disinflation and/or deflation is the order of the day in most economies. But fear trumps reality these days, and gold is strong,” he said.

Friday’s losses notwithstanding, market watchers are looking for gold’s trend to go higher.

Ira Epstein, director of the Ira Epstein Group at the Linn Group, said even though gold closed weaker, the way it curbed losses was a good sign, especially since it was fighting a higher dollar.

The summer doldrums might still inflict light trading volume on gold next week, Epstein said, but the market is getting ready to enter a seasonally strong time once September comes. “It’s ripe for long-term gains,” he said.

For next week, resistance is seen at $1,244 and support $1,220. The falling euro and stock market weakness will influence gold next week. Markets will begin to look again at more stimulus plans possibly coming from governments, but until the Labor Day holiday has come and gone those discussions are moot, he said.

The head of a trading desk at one bank described overall sentiment as “positive” lately and suggested this momentum is likely to continue next week. Many analysts are calling for gold to reach the $1,275-$1,300 level by year-end.

Gold has been underpinned by worries about a generally soft economy, prompting some investors to seek safety in the yellow metal, the trader said. He also cited concerns that China may be looking to divert some of its reserves into non-dollar assets, such as the Japanese yen. This potentially can hurt the dollar, which in turn often helps gold due to their inverse relationship.

There was some talk Friday and the Bank of Japan would intervene in currency markets, as the yen remains at 15 year highs. Alan Bush, senior financial futures analyst at Archer Financial Services, said ideas that the Ministry of Finance will not intervene at current levels in an effort to limit the appreciation of the yen is supporting the currency. Bush said Japan has not entered the foreign exchange markets to weaken the yen since 2004.

Investor interest in gold exchange traded funds holdings is rising again lately, the trader said, adding to gold’s strength. Holdings in the world’s largest gold ETF, SPDR Gold Shares, stood at 1,299.47 metric tons as of Thursday, up from 1,282.75 as of Aug. 10, according to the ETF’s Web site.

“It looks as though the safe-haven money is coming back in,” said the trader.

Still, he said, there is potential for some choppiness. For instance, the market is also vulnerable to short-term price pullbacks if some participants opt to sell to book profits in thin late-summer trading conditions.

“If somebody looks to take profits, it can whack markets too thin to absorb,” he said. “It’s like thin holiday trading.”

 Bart Melek, global commodity strategist with BMO Capital Markets, said gold has been underpinned lately by some “lousy” U.S. economic indicators, including a rise in weekly initial jobless claims and a weak Philadelphia Fed survey on Thursday.  

The market is not likely to get any data next week convincing traders that the global economy is suddenly doing “fabulously,” Melek said.

“As such, we’re probably going to have problems with risk appetite,” Melek said. “That generally means that gold should do OK, mainly as a result of safe-haven buying. I don’t expect huge rallies, but some upside pressure. We’ve certainly seen that this week, and we expect to see that next week as well.”

In fact, he added, there is potential that gold could rise with the U.S. dollar if both should attract some safe-haven flows.  

The main U.S. reports on the calendar next week include existing- and new-home sales, durable-goods orders, revised second-quarter gross domestic product and consumer sentiment.

While gold should continue firmer, the funk surrounding the global economies is weighing on industrial metals.

“The industrials like copper are seeing more hedging due to poor payroll and other evidence of malaise,” Gero said.

Ed Meir, analyst at MF Global, said next week’s U.S. economic numbers should give the industrial metals direction, but the general view is that economies are slowing. “The current sell-off seems to be validating the view expressed in recent commentary that the run experienced in a number of commodity complexes over the past few weeks-- metals included-- was getting increasingly hard to justify given the slowing macro momentum evident in a number of countries,” he said.

By Allen Sykora of Kitco News; asykora@kitco.com and Debbie Carlson of Kitco News; dcarlson@kitco.com

Editor’s Note: Meet the Kitco News Team at the upcoming Kitco Metals eConference September 12-13, 2010. A not-to-be missed event featuring Ron Paul, Marc Faber and other industry heavyweights. The eConference is free with Pre- Registration www.kitcoeconf.com.