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Gold may rally to $1,300 if Fed delays taper

Gold prices may close the year near $1,300 lifted by a "relief rally" if the U.S. Federal Reserve votes this week to keep stimulus measures intact, CNBC's latest survey of bullion market sentiment shows.

The precious metal, one of the biggest casualties of Fed 'taper' fears, has lost more than a quarter of its value this year – its first annual decline in 13 years as investors increasingly rotate into equities and away from safe-haven bonds and bullion.

"If the Fed defers a taper, we should see gold bounce from oversold levels which could help it test $1,300 again," said Mark O'Byrne, Founder and Executive Director of Dublin-based bullion dealer GoldCore. "We do not believe the Fed will 'taper' as the U.S. economy remains very fragile and any reduction on bond purchases could lead to turbulence in financial markets, a rise in bond yields and affect the wider economy."

(Read more: Gold in 'flux' until taper timeline gets clearer)

CNBC's latest survey of market sentiment showed 52 percent of respondents (14 out of 27) expect prices to decline this week, 26 percent (7 out of 27) say prices will trade at around current levels while 22 percent (6 out of 27) expect price gains.

However, some believe that the Fed may reduce the monthly pace of bond purchases by between $5 billion and $10 billion at its policy-setting this week – Chairman Ben Bernanke's last before his term expires at the end of January 2014 – as recent data suggest that the economy is gaining momentum.

If the Fed does act this week and reduces its massive bond buying program marginally, "gold will likely fall to test strong support at $1,200 again," GoldCore's O'Byrne said.

(Read more: Gold is just the tip of the 'Taper Tantrum')

However, a Fed taper this week remains a minority view though one that has started taking on more prominence as U.S. economic data improves and the risk of a U.S. budget showdown fades after last week's tentative bipartisan agreement.

AP

"A delay in the Fed's QE taper may start a relief rally in gold but limited due to the eventuality of a taper in the near term," said Edmund Moy, Chief Strategist at Morgan Gold and a former director of the U.S. Mint.

A Reuters poll of more than 60 economists taken last week showed thirty-two economists expect the U.S. central bank to act in March. Twenty-two said it would scale back its monthly bond-buying program in January and only 12 economists expect an announcement next week.

(Read more: Gold is just the tip of the 'Taper Tantrum')

"I am not convinced that the Fed will take the training wheels off of this economy right now," said gold bull Scott Carter, the chief executive officer of Los Angeles-based Lear Capital, who expects the Fed to delay the taper. "If we look behind the numbers there are still some serious problems with this economy. This keeps gold very much in play… I look for gold to recover some of its recent losses."

'Unwinding'

The 'no taper' scenario may offer gold only a temporary fillip, strategists said, as persistently sluggish Asian physical demand, continued investor selling of exchange-traded products and low inflation will mean any rebound swiftly finds sellers.

UBS strategists Dominic Schnider and Giovanni Staunovo said they expected "some unwinding" of bearish futures bets held by short-term investors. Those bets sharply increased in recent weeks – more than doubling since early November – and now look over-stretched.

(Read more: Goldman predicts steep losses for gold in 2014)

Hedge funds and money managers raised short positions, or bets that prices will fall, in U.S. gold futures and options close to a 7-1/2 year high, data by the Commodity Futures Trading Commission showed on Dec. 6.

Though a "deferral of the taper starting date" by the Fed may help generate some short-covering, UBS cautioned that it won't be enough to keep prices in an "upward" trajectory.

That's because outflows from exchange-traded funds such as the gold-backed SPDR Gold Trust "remain a drag with no inflation pressure around the corner and less needs to ensure against tail risk events in the global economy," UBS said.

By CNBC's Sri Jegarajah. Follow him on Twitter @cnbcSri

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