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Gold is stuck in neutral and remains at the mercy of the US dollar and bond yields next week

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(Kitco News) - The gold market appears to have hit solid resistance heading into the weekend, and Friday's price action could set the tone for what is expected to be a relatively quiet shortened trading week, according to analysts.

Gold prices saw a solid recovery from August's multi-month lows this week, but some analysts note that the precious metal didn't have enough momentum to break into bullish territory. With North American markets closed Monday for the Labor Day long weekend, analysts have said that a breakout is unlikely in the short term.

This past week saw December gold futures push to a three-week high, briefly hitting $1.980.20 an ounce Friday following a lukewarm nonfarm payrolls report. Although the economy created more jobs than economists expected, wage gains were weaker than expected and the unemployment rate rose sharply.

However, the rally has cooled slightly, with December gold futures last trading at $1.967.30 an ounce, up 1.4% from Friday's close.

Gold rallied to its highs after the jobs report showed that 187,000 jobs were created in August, with consensus forecasts looking for growth of around 170,000 jobs. At the same time, employment numbers for June and July were revised sharply lower. The unemployment rate also rose to 3.8%, up from 3.5%, where economists were looking for an unchanged reading.

Some analysts said that while signs of slack are starting to build in the labor market, the data did not provide any definitive direction for investors.

"For now, the easiest trade in global markets is to squeeze the economy bears in the bond market," said Daniel Ghali, senior commodity strategist at TD Securities. "Elevated bond yields and the U.S. dollar will continue to keep gold prices contained."

While Ghali is relatively neutral on gold in the near term, he added that investors shouldn't ignore the surprising strength in the marketplace as prices hold their ground against higher bond yields and a strong U.S. dollar.

"Gold prices haven't fallen as much despite where the U.S. dollar is, so there is market demand," Ghali said. "However, we need to see definitive signs that the Federal Reserve is ready to cut interest rates and the economy isn't there yet."

Phillip Streible, chief market strategist at Blue Line Futures, said that while gold has managed to neutralize its bearish downtrend, it has some ways to go before it enters bear market territory. He added that gold remains in no man's land as prices are caught in a channel between resistance at $1,986 and support at $1,936 an ounce.

"I don't see anything right now that will stop the momentum in bond yields," he said.

James Stanley, senior market strategist at, said that he also sees gold caught in a tug of war in the near term; however, he added that gold bulls may have a near-term advantage.

"The fact that gold bulls have held support even as USD strength has come back in the past couple of days is a pretty bullish factor," he said.

With little economic data scheduled to be released next week, analysts suggested that investors keep an eye on the U.S. dollar and bond yields. The U.S. dollar Index remains near a three-month high above 104 points.

Meanwhile, 10-year U.S. bond yields, while down from last week's 15-year highs, are holding above 4%. Although the threat of further rate hikes from the Federal Reserve has diminished following Friday's disappointing employment numbers, analysts note that it has not completely vanished.

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According to the CME FedWatch Tool, markets see the U.S. central bank leaving rates unchanged in September, and they're pricing in a 60% chance of no move in November as well.

While the data highlights slowing economic activity, some analysts have said a more decisive trend is required.

"We will need to keep a close eye on US data releases in the coming weeks, which could shed more light on what the Fed may do," said Ewa Manthey, commodities strategist at ING. "We believe gold will remain volatile in the near term given the implications of the uncertainty of persistent inflation on the US economy, and its trajectory will be influenced by US economic data in the coming weeks. We believe the threat of further action from the Fed will continue to keep the lid on gold prices for now."

Commodity analysts at Commerzbank also noted that gold could remain caught in neutral territory as "it is still far from clear how US interest rate policy will develop."

Next week's data:

 Wednesday: Bank of Canada monetary policy decision, ISM Services PMI
¬†Thursday:  Weekly jobless claims

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