Gold price is ready to bounce but dollar strength still a downside risk
December gold futures last traded at $1,947 an ounce, up nearly 2% from the week.
"Last week, we were testing support at the 50-day moving average and now we are up on the week challenging the 20-day moving average," said Charlie Nedoss, senior market strategist with LaSalle Futures Group. "I think the path of least resistance is up."
Nedoss said that he would like to see gold prices close the week above $1,954. He added that ultimately the uptrend is still intact as prices trade above $1,941 an ounce.
Analysts note that rising inflation pressures continue to put pressure on real yields, which is a positive environment for gold; however, on the other side, some analysts have said that in the near-term, investors need to pay attention to strength in the U.S. dollar index.
"The U.S. dollar has found a footing and that will make it tough for gold to gain ground in the near term," said Adam Button, chief currency strategist at Forexlive.com.
How to trade gold that has nowhere to go
With gold stuck neutral and volatility falling, Darin Newsom, president of Darin Newsom Analysis, said that now is a good time to play the options market.
"You want to buy options when volatility is low and sell options when volatility is high. Right now, volatility in gold neutral," he said.
Newsom said that he is bearish on gold as the technical chart looks heavy; however, he added that investors can't ignore the fact that gold is holding critical support, even in an environment of resilient equities and a stronger dollar.
"A market that can't go down won't go down. "There is something that is holding the price up and I think it is all the tension and uncertainty in the marketplace," he said.
Because of his bearish bias, Newsom said that he likes the idea of buying a December put option around $1,900 or $1,910. He added that his downside target for gold is the four-week low at $1,874.
He added that investors have limited risk with the put option if the price ends up breaking to the upside.
All Eyes on the Fed
Looking ahead to next week, analysts say that market sentiment will depend on the latest action from the Federal Reserve as it holds its monetary policy meeting. This will be the first meeting for the central bank after the committee announced its new inflation target for an average 2%.
Many analysts have said that the Federal Reserve's new inflation target and its focus on promoting full employment create a new long-term uptrend in gold.
Commodity analysts at TD Securities said that they expect the Federal Reserve to continue to reiterate its ultra-accommodative stance.
"We expect next week's FOMC to clear the second hurdle for yellow metal bulls — officials should send a dovish signal through the wording on QE, the extension of the dot plot through 2023, and the Chairman's press conference," the analysts said in a report Friday. "Over time, this will open up the door to an extension in the average maturity of Treasury purchases, which should further support precious metals. In this context, we argue that the trading set-up in precious metals is ripe for a breakout higher."
Economists at Nomura note that while they don't expect to see any major monetary policy announcements next week, the meeting will be important as the central bank will release its updated economic projections, including forecasts for 2023.
"We believe the September meeting will involve discussions on key longer-run topics, but announcements for major policy innovations will need to wait until later this year," the economists said.
However, many gold analysts have said that investors should ignore the Federal Reserve's more nuanced messaging and focus on the big picture, which is that interest rates are not going anywhere anytime soon. With inflation expected to continue to tick higher, real interest rates will be moving lower.
"In real terms, interest rates are going to stay negative," James Steel, chief precious metals analyst at HSBC. "In the current environment of low interest rates holding a non-yielding asset like gold becomes more attractive."
Aside from the U.S. Federal Reserve meeting, the docket of economic data in the U.S. will be relatively light next week. Regional manufacturing sentiment data and retail sales for August are expected to create some volatility for markets.