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New momentum in U.S. dollar, ECB biggest risks for gold price - analysts

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(Kitco News) -  A resurgence of bullish momentum in the U.S. dollar represents most significant risk for the gold market next week as the price remains caught in a grinding consolidation pattern, according to market analysts.

The short-term outlook comes as the gold market prepares to end another volatile week trading in a nearly $80 range. The precious metal started the week strong testing resistance at $2,000 an ounce. All of its gains were erased as the U.S. dollar bounced for more than two-year low.

Looking ahead, the shortened trading week due to the Labor Day long weekend Monday means that investors can expect gold prices to be caught between support at $1,920 and resistance at $2,000 an ounce, some analysts have said.

The gold market is ending the current week with a nearly 2% lose; December gold futures last traded at $1,935.20 an ounce. The gold market saw some modest selling pressure Friday after the U.S. Labor market said that nearly 1.4 million jobs were created in August. At the same time, the unemployment rate dropped to 8.4%.  Wages increased by 0.4%.

For some analysts, the recent bounce in the U.S. dollar is not a significant surprise. It has seen speculative short positioning rise to record levels. Analysts have noted that the greenback is ripe for a short squeeze.

“Right now it’s the dollar’s time to move,” said Bill Baruch, president of Blue Line Futures.

Although sentiment in the marketplace is turning a bit more cautious as the gold price could not break through resistance at $2,000 an ounce, some analysts have said that any further drop should be seen as a buying opportunity.

Bart Melek, head of commodity strategy at TD Securities, said that although the U.S. dollar has room to push higher, strong fundamental factors will continue to support gold. He added he is expecting gold to continue to hold support at $1,920 an ounce.

“Could gold drop below $1,900? That is a possibility, but we think the price holds and starts to move higher,” Melek said. “This is a very good time to buy gold. We don’t think stimulus measures are going away any time soon, so inflation is going to push higher and real bond yields will go lower.”

Adam Button, chief currency strategist at Forexlive.com, said in an email that he expects the gold prices to continue to consolidate as the markets wait for more information regarding potential stimulus measures.

He added that better than expected economic data in the U.S. could weigh on those expectations.

“The drop in U.S. unemployment makes it less likely the Fed will deliver a dovish surprise this month,” he said. “That will keep a bid in the U.S. dollar and a lid on gold.”

Chris Vecchio, senior market strategist at DailyFX.com, said that although he expects gold prices to remain to tread water as the market faces the end of the summer doldrums.  However, he added that investors need to stay focused on the long-term outlook.

“Right now, we are seeing a lot of churn in gold and that is not surprising because this is a crowded market,” he said. “But we are entering what is traditionally a volatile period for financial markets and gold does well during periods of high volatility. I may not be buying gold right now, but I am certainly not selling it.”

Keep an eye on the ECB

While improving economic data will provide some support for the U.S. dollar, most analysts warn investors to watch external factors, particularly the European Central Bank’s monetary policy meeting to be held Sept. 10.

The U.S. dollar’s biggest move this past week and gold’s worst day came after ECB member Philip Lane said that the euro’s level against the U.S. dollar does matter.

“The ECB has to get inflation going so and that means more stimulus measures,” said Baruch. “That is going to push the euro down and the dollar up.”

Economists at Nomura said that they are not expecting the ECB to act just yet on the disappointing inflation pressures; however, if they did, it would be through stimulus measures and not a rate cut.

The ECB has already pushed interest rates into negative territory.

“The benefits that a 10bp rate cut would bring to inflation at these levels are marginal, notwithstanding its beneficial impact on the euro,” the economists said.

Eugen Weinberg, head of commodity research at Commerzbank, said that he expects that it is only a matter of time before the ECB introduces more stimulus measures.

“The ECB should probably do more to boost inflation. They certainly have room to do more,” he said.

Turning back to North American markets, it is a relatively light week for economic data with investors focusing on inflation data Thursday and Friday.

In Canada, the Bank of Canada will hold their monetary policy meeting Sept. 9. Some economists have said that there is a growing probability that the central bank will follow in the Federal Reserve’s footsteps and announce a shift in inflation targeting.

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