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Market volatility is bullish for gold: Is $1,800 back on the table next week?

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(Kitco News) Gold is on a roll as market volatility is working in favor of higher prices amid renewed concerns about the U.S. economic recovery and the second COVID-19 wave. But is it enough to finally break gold out of its trading range?

Gold has turned its losses around this week with the precious metal rallying 3.5% since last Friday's close after the Federal Reserve ruled out a V-shaped recovery in the U.S.

At the time of writing, August Comex gold futures were trading at $1,742.50, up 0.16% on the day, after hitting a weekly high of $1,754.80 on Thursday.

The majority of analysts Kitco News spoke to were mostly bullish on gold next week but still uncertain on whether gold could break out above $1,800.

"Volatility is back and this is what we should be paying attention to. We could see bigger swings in gold. Volatility is bullish for gold and it would deter some risk-on sentiment," said Gainesville Coins precious metals expert Everett Millman.

The Fed popped the optimistic bubble building around the idea of a quick economic recovery in the U.S., which led to a significant selloff in stocks this week.

On Wednesday, the central bank kept interest rates unchanged and signaled no rate hikes through 2022. The Fed reiterated that it is committed "to use its full range of tools" to support the U.S. economy and projected for the U.S. GDP to contract by 6.5% this year. 

Price levels to watch

Next week, markets could still be busy pricing in their reaction to the Fed's meeting, Millman said. "Investors hang on to what the central bank says … and the Fed's outlook dampens the general confidence. Plus, the economic data is going to be bad. Markets will be searching for direction. This is a tailwind for gold," he noted.

Low inflation pressures, however, are likely to prevent gold from rising too much next week, TD Securities head of global strategy Bart Melek pointed out.

"Gold has increased in volatility quite a bit … and it is close to breaking through," Melek said Friday. "But it might be premature for an outright breakthrough. Looking at low-end around $1,700 and on the high-end at $1,757 … There are issues down the road in the form of weak inflation."

In the long-term, however, Melek is very bullish on gold, stating that once inflation kicks late next year, gold will reach $2,000 an ounce.

Next week, the markets might be entering an in-between period, where investors choose to wait before committing to the market one way or the other, noted SIA Wealth Management chief market strategist Colin Cieszynski.

"I am neutral on gold and looking for a sideways trend between $1,655-$1,765," Cieszynski told Kitco News on Friday. "For the next few weeks, we are probably going to see a lot of neutrality across a lot of markets as we are heading into mid-point of the year. There is a ton of positive and negative news and people are waiting to see how things shake out … Central banks unleashed all this stimulus and there is not going to be anything new coming for awhile. Markets are stabilizing."

Millman is slightly more bullish in the short-term, widening his next week's range to include $1,800 an ounce. "Given the volatility, my range has extended. On the upside, I am looking at $1,800 and downside $1,650," he said.  

The next big resistance level for gold is $1,760, said LaSalle Futures Group senior market strategist Charlie Nedoss. "If we challenge that next week, we will be looking at $1,780 as next resistance," Nedoss added.

Second COVID-19 wave

Another major driver next week will be renewed fear of the second COVID-19 wave as some U.S. states are face climbing coronavirus case numbers as they begin to reopen.

"Adding to the concern in markets over the past few days have been signs that the spread of the coronavirus still hasn't been brought under control in parts of the country. Although the number of daily new cases continues to trend gradually lower at a national level, the past couple of weeks have seen a notable spike in cases in a number of states including Florida, Texas, Utah and, most clearly, Arizona, while new cases in California are still climbing steadily," said Capital Economics senior U.S. economist Andrew Hunter.

And even though a second round of state-wide lockdowns is not a significant threat yet, consumers might be put off from going out and shopping noted Hunter.

Key data

The markets will be eyeing the Fed Chair Jerome Powell semi-annual testimony to Congress on Tuesday and Wednesday, in which he is likely to reiterate the Fed's dovish message from this week.

Other critical pieces of macro data will be May's retail sales and May's industrial production in the U.S., which are both scheduled to be released on Tuesday.

"The U.S. focus will be on how high retail sales and industrial production bounce following the ending of lockdowns across many states. Given car sales numbers have rebounded strongly we expect robust retail sales," said ING economists on Friday. "Factory re-starts should also mean robust manufacturing activity, but oil and gas extraction will be a drag on industrial production overall."

Other data sets next week include Monday's NY Empire State Manufacturing Index from June, Tuesday's Bank of Japan interest rate decision, Wednesday's U.S. building permits and housing starts, and Thursday's Bank of England interest rate decision, the U.S. jobless claims, as well as the Philadelphia Fed Manufacturing Index from June.

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