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CPI could be a make-or-break moment for gold next week as prices look for direction

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(Kitco News) - The gold market is back in no-man's land as the price is pushed and pulled between rising bond yields and continued economic uncertainty. According to some analysts, next week's inflation data could be a "make or break" moment for the precious metal as it struggles to find direction.

Gold's neutral outlook comes as prices look to end the week holding critical near-term support levels but cannot generate enough momentum to retest important resistance. December gold futures last traded at $1,977 an ounce, down 1% from last week.

Although the gold market is looking to end the week off its lows, analysts note that the precious metal still faces some problematic headwinds as economic data does not provide definitive evidence that the Federal Reserve can ease away from its hawkish bias.

Friday's nonfarm payrolls report provided markets with a mixed picture at best as the headline employment number missed expectations, but wage inflation rose. The latest nonfarm payrolls report showed that 187,000 jobs were created in July, compared to economists' expectations for job growth of 200,000. At the same time, wages grew 0.4% last month.

Some analysts have said that for gold to regain its luster and hold gains above $1,980 an ounce, the June Consumer Price Index, published next week, must come in cooler than expected.

"I'm cautiously bullish on gold next week, but if CPI is weak and gold can't rally, then I think this market is done for now," said Dan Pavilonis, senior commodities broker with RJO Futures. "If gold can't rally in that environment, then I think the market needs to reset and consolidate at lower prices."

However, some analysts are not convinced that inflation is ready to drop further. Christopher Vecchio, head of futures and forex at, said he is not convinced that inflation will reach the Fed's 2% target.

He added that base effects supporting CPI's decline since last year's highs are now working themselves out of the market. He also pointed out that the U.S. economy is facing a renewed rise in food and energy prices.

"I think the risk is that the inflation data supports the Fed's view that interest rates will have to stay higher for long. We could also see markets start to price in a November rate hike. That would create a tough environment for gold," he said.

Vecchio said that he is neutral on gold as he also doesn't want to bet against gold as it looks like U.S. 10-year bond yields above 4% could be peaking.

Gold prices test critical support following Fitch downgrade, will take time to regain safe-haven status

"I haven't seen any direction in gold for a few weeks. Every time we bounce past $1,950, the rally doesn't last long; every time we drop below, the selloff doesn't last. Frankly, the technicals are a mess," said Vecchio.

He added that there is also a risk that even if the inflation data comes in weaker than expected, it might not be enough to change the Federal Reserve's hawkish basis as there are still a lot of numbers to be published ahead of September's or November's monetary policy meetings.

But it's more than just the Federal Reserve's monetary policy stance hanging over the gold market. The precious metal has found solid support as fears of a slowing economy support safe-haven demand.

Added to the mix was this past week's debt downgrade from Fitch Ratings. Tuesday night, the rating agency downgraded the U.S. government's long-term debt to 'AA+' from 'AAA.

Ed Moya, senior North American market analyst at OANDA, said there is a concern that this downgrade put more focus on the health of the U.S. economy and that rising bond yields could actually create some safe-haven demand for gold.

"If bond yields continue to rise, that could spook markets," he said. "Higher rates for longer is still an environment that gold can thrive in, especially if Wall Street becomes fixated over the deficit.

Despite gold's near-term volatility, Moya said there are still good reasons to be bullish on gold long term as the Federal Reserve nears the end of its tightening cycle.

"It's going to be a bumpy ride to get inflation down to 2%, but the Fed can achieve that goal because the economy is slowing," he said. "We are starting to see the end of monetary policy tightening as the Fed gets closer to its goal and that supports gold prices."

However, Vecchio said he doesn't expect the recent debt downgrade to create much fear in the market. He added that economic conditions are completely different than they were in 2011 when the S&P 500 spooked markets with its downgrade, which ultimately drove gold prices to then-all-time highs above $1,900 an ounce.

"The Fitch downgrade made a nice headline, but the criteria they used seems kind of flimsy," he said. "We saw bonds selloff this past week because investors are buying into the soft-landing and reducing their exposure to safe-haven assets."

While bond yields have room to move higher before they challenge the multi-year highs in October, analysts note that they are currently at levels that sparked the banking crisis in March and April, which saw several major regional U.S. banks collapse.

Next week's data:

Thursday: U.S. CPI, weekly jobless claims
Friday: U.S. PPI, University of Michigan Consumer Sentiment

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