Geopolitical uncertainty is helping to support gold prices, but an impending rate hike in less than two weeks could finally take its toll on the market, with some analysts expecting gold prices to test support below $1,300 an ounce in the near-term.

The gold market closed its second week in relatively neutral territory, within a narrowing trading range. April gold futures last traded at $1,329 an ounce.

"Gold has remained resilient, but it could be overwhelmed by headwinds of higher bond yields, and a stronger U.S. dollar," said Maxwell Gold, director of investment strategy and research at ETF Securities said in an interview.

After a lackluster start to the year, silver is starting to outperform gold as prices are ending the week with modest gains. Many analysts are optimistic that silver will eventually outshine gold in a market that is seeing increased demand. May silver futures last traded at $16.695 an ounce, up more than 1% from the previous week.

Looking ahead, Gold said that he expects precious metals to follow its familiar pattern of selling off ahead of the Federal Reserve's monetary policy decision and then rallying once investors gauge the underlying trajectory of interest rates for the rest of the year.

Gold's comments come following economic data that showed that the U.S. saw 313,000 new jobs created in February, well above expectations of gains of around 200,000.

"The probability of a March rate hike, as implied by OIS and Fed Funds futures, has been rising steadily since the start of the year and another strong increase in US non-farm payrolls today all but ensures a 25bp hike in the policy rate on 21st March,' said commodity analysts at Capital Economics.

However while the economy continues to create jobs, wages remain lackluster. Wages increased only 0.1% last month, below expectations for salaries to rise 0.2%. Many economists have noted that without wage growth, inflation will struggle to push higher.

While markets are expecting higher rates in March, ultimately, Gold said that the lack of inflation and the ongoing threat of geopolitical uncertainty would keep the U.S. central bank from aggressively raising interest rates in 2018.

"If we are not seeing inflation or growth picking up, it's hard to justify an accelerated path of tightening. Market expectations will recalibrate in the second half of the year and that is when we will see gold prices benefit the most," he said.

In the near-term, Gold said that he could see prices trade between $1,250 and $1,300 an ounce.

"Any dip below $1,300 is a very attractive entry point to build up a strategic allocation in gold," he said.

Darin Newsom, senior technical analyst at DTN, said that he is also watching $1,250 an ounce as he thinks the market is looking a little heavy.

"Gold's inability to break through $1,380 has been very interesting. Gold has been resilient lately but its technical picture is forming what looks like a weak branch that is ready to snap," he said.

Inflation Remains Key For U.S. Monetary Policy & Gold

With so much focus on interest rates, gold investors will need to keep an eye on inflation data, which will be released next week. Economists are expecting U.S. Consumer Price Index to show annual inflation rising 2.2% in February.

However, core inflation, which strips out volatile food and energy prices is expected to remain unchanged from the previous month, increasing 1.8% for the year.

Gold Still Tied To The U.S. Dollar

Although sentiment in the gold market is starting to turn bearish as prices have been unable to retest recent highs, one currency analyst says that it is too early to call an end to the market uptrend.

Neil Mellor, senior currency analyst at the Bank of New York Mellon, said that he sees both the U.S. dollar and gold caught in a neutral trading range as both markets face the same balance of headwinds and tailwinds.

While an impending March rate hike will is bullish for the U.S. dollar, ongoing geopolitical uncertainty will weigh on the greenback. Geopolitical tensions have risen because of the potential of a trade war after the U.S. government announced it will implement a 25% tariff on steel imports and 10% tariff on aluminum imports in 15 days.

"I think the market has to have an overriding reason to go one way or another," he said. "Would you want to push the U.S. dollar higher when there are all these political issues? But do you push the dollar lower if the Fed pushes forward with interest rates hikes?"

Ultimately, Mellor said that they are bearish on the U.S. dollar long-term as the bank expects that the central bank will be reluctant to raise rates aggressively in the current market environment.

"When you have no inflation and the threat of trade wars and currency wars you don't want to be aggressively raising rates," he said. "No central bank wants to see a stronger currency in these market conditions."

Levels To Watch

On the downside, the critical level to watch remains $1,300 an ounce. Many technical analysts have said that gold needs to hold this support level to maintain its bullish uptrend.

Newsom said that if $1,300 breaks then the next target to watch is at$1,287 an ounce, but he added that he expects to see an even broader correction to $1,250 an ounce.

On the upside, Chris Beauchamp, market analyst at IG, said that gold prices have to push above $1,340 an ounce to attract new buying momentum.

Bill Baruch, president of Blue Line Futures, said that a weekly close above $1,323 an ounce would neutralize the recent selling pressure and give a small edge to gold bulls in the near-term.

-Written by Neils Christensen for www.kitco.com

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