(Kitco News) - Gold’s performance next week will hinge in large part on how political unrest in the Middle East plays out and whether any events trigger a worsening of the European debt crisis.

Nevertheless, as Friday’s activity wound down, there as a degree of optimism among futures analysts that gold will stabilize and start to work higher again, particularly since it appears the conflict in Libya may last a while and the U.S. dollar was starting to give back some of its new-found strength.

April gold futures on the Comex division of the New York Mercantile Exchange settled Friday at $1,421.80 per ounce, down $6.80 from the previous week. Silver has been outperforming gold in recent weeks, and this trend continued. May silver settled at $35.933, up 60.6 cents for the week.

Military forces of Libyan leader Moammar Gadhafi are continuing to pound rebel forces, in particular aiming at the key oil port of Ras Lanuf. Worries continue that the political unrest, in which uprisings overthrew the rulers of Tunisia and Egypt, will keep spreading to other Middle East-North African nations, particularly Saudi Arabia. Planned protests there appeared limited, apparently deterred by police, but with some violence reported.

The potential for more violence in the region is “a wild card going into the weekend,” said Adam Klopfenstein, senior market strategist with Lind-Waldock. “The direction (of gold prices) will be dependent on those events and the European debt situation.”

If these situations worsen, gold may attack the $1,450 level, he said. However, Klopfenstein continued, gold could instead dip below $1,400 area if the Mideast violence abates.

Overall, however, others looked for gold to start picking itself up after correcting lower from a record high early this week. The April futures backed down form a Monday peak of $1,445.70 an ounce to a low Thursday of $1,403, before holding its ground. Much of the decline occurred on Thursday in response to dollar strength and disappointing Chinese trade data, which prompted longs to book profits on their previous gains.

“I think the thing that is going to rule the day” is the ongoing Mideast crisis and its impact on crude oil prices, said Mike Daly, gold and silver specialist with PFGBEST. Crude ran up to longtime highs recently as much Libyan oil production was halted by the unrest, and gold in turn followed on both a flight to safety and also a hedge against the inflation due to rising oil prices. The Libyan conflict appears to be lasting longer than many might have initially expected, Daly said.

“Even though Gadhafi stated he would fight to the death, most people thought he would see the writing on the wall, take the money and leave,” Daly said. “But it’s not happening. They are vowing to beat the rebels back at every turn and fight to the last drop of Gadhafi’s blood.

“Right now, the world is looking at what is happening in the Middle East and North Africa and seeing if the worst is over, or if it’s going to escalate even more.”

In the meantime, Daly said, some investors will keep turning to safe-haven markets such as gold and silver. Furthermore, he cited concerns about inflation and Europe’s debt issues that keep resurfacing, such as a downgrade of Spanish debt Thursday by Moody’s Investors Services that had pressured the euro and supported the dollar.

Sterling Smith, market analyst and commodity trading advisor with Country Hedging, said he was more optimistic about gold’s prospects next week as Friday’s trading wound down than he was early in the session. He cited a pullback in the dollar, with potential for follow-through selling on Monday. A weaker greenback tends to support gold.

“I’m getting a more positive feel for the gold market here,” Smith said.

Additionally, he said, there are still concerns about the health of the U.S. economy, leading to market chatter that the Federal Reserve might undertake additional quantitative easing beyond the central bank’s current second round of bond buying—meant to push market-set interest rates lower—that is scheduled to end around mid-year.

“I think the (gold) market is going to start trying to build in some risk premium…in anticipation of some sort of extension of the current program or some sort of modified third program, given the severe drop in consumer sentiment,” Smith said.

Technically, $1,400 will be “big, big” chart support for April gold next week, Smith said. As of Friday’s pit-session close, the market held just above here each of the last two days with lows of $1,403 on Thursday and $1,404.80 Friday. Smith put chart resistance around $1,425 and $1,432.

.

By Allen Sykora of Kitco News; asykora@kitco.com

Check out Kitco's coverage of the PDAC convention in Toronto

<<Back to more Kitco exclusive news