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Upbeat US data may erode gold’s gains

LuisPortugal | iStock / 360 | Getty Images

The deepening crisis in Ukraine will continue to boost safe-haven demand for gold though any evidence of a resilient U.S. economy in this week's key scheduled data releases may erode prices, CNBC's weekly sentiment survey showed.

"We have been warning about the headline risk out of the Ukraine for some time now, something we felt the bears should not get too complacent about," said Edward Meir, an analyst at INTL FCStone in New York. "We would prefer to tip our trading books towards the long side in gold."

Just over half of the respondents in CNBC's weekly survey (51 percent) agree with Meir, saying the price of gold will rise this week. Reinforcing the bullish view of CNBC's poll, the latest data from IG Markets shows 81 percent of their more than 501 clients with open positions expect gold prices to advance.

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But almost a third (31 percent) forecast a decline. Positive surprises in U.S. data this week - which include the ISM manufacturing index and Friday's non-farm payrolls - represent the biggest downside risks.

Reuters' forecasts predict a 200,000 gain in April payrolls, a modest improvement from March's 192,000.

"Geopolitical factors should mean only short-term price noise," gold bears UBS said. "Accelerating economic activity in the U.S. and the developed world favors an end to the Fed's asset-purchase program in late 2014 and rate hikes in 2015."

Ensuing higher interest rates and "solid" economic growth in the U.S. "will increase the opportunity costs of holding the yellow metal and sow the seeds for another wave of ETF (Exchange Traded Funds) gold selling, about 300-400 tons, over the next 12 months," said UBS strategists Dominic Schnider and Giovanni Staunovo in emailed comments to CNBC.

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A forecast-beating jobs number, "could see further gold liquidations," said Mark O'Byrne, Founder and Executive Director of Dublin-based bullion dealer GoldCore. "Conversely, a worse-than-expected number will lead to safe-haven demand and could be the catalyst gold needs to get out of its recent funk."

On balance, O'Byrne holds a bearish view on gold for the week. "Momentum is a powerful force and trend following traders and algorithms could push gold lower," he said. "There remains the possibility of further weakness and gold testing its big level of support above $1,180/oz."

Ukraine

The stand-off between Russia and the West over Ukraine saw gold climb to its highest level in one-and-a-half weeks on Monday, steadying above $1,300/oz as weaker equities and escalating geopolitical tensions boosted the metal's safe-haven appeal, Reuters reported. The metal dropped to a 2-1/2 month low last Thursday at $1,268.24.

The metal may trade in a short-term range of $1,270-$1,320, strategists and traders told CNBC. As long as $1,280 support holds, "we do have some confidence for the uptrend to continue," said Naeem Aslam, chief market analyst at Ava Trade. "A break of this will call all bets off and the downward trend could pick up steam."

President Barack Obama said on Monday the United States will impose additional sanctions on Russia targeting individuals and companies over the crisis in Ukraine, a move expected to be followed by separate sanctions from the European Union, Reuters reported on Monday.

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Gold strategists contacted by CNBC late last week widely anticipated that the West would widen sanctions against Moscow but not all believed it would trigger a fully-fledged flight to safety.

Russia would respond to the latest sanctions, said Edmund Moy, Chief Strategist at Morgan Gold and a former director of the U.S. Mint. Though such escalation "might be bad for the world," it would trigger rotation into safe-haven assets, benefitting gold, said Moy, who holds a bullish view on the market this week.

Scott Carter, the chief executive officer of Los Angeles-based Lear Capital, is also looking for gold to gain. "The Ukraine currency is tanking and investors in those markets are fleeing to gold as it has proven to hold value and is transferable anywhere in the world."

Others were more skeptical, arguing that the safety bid will be sporadic at best, reacting to the ebb and flow of headlines from the Ukraine crisis.

"Gold's only friend at the moment is the on-and-off support from safe-haven demand related to Ukraine," Ole Hansen, Saxo Bank's head of commodity strategy, told CNBC. "This will probably keep many from going outright short at the moment so most of the selling we are seeing are hedge funds scaling back net-longs and ETP (Exchange Traded Product) holdings that continue to be reduced. Unless the Ukraine crisis escalates I see the path of least resistance being to the downside."

Mark Keenan, Cross Commodity Research Strategist at Societe Generale, said gold's failure to rebound convincingly despite the steady deterioration in the crisis in Ukraine suggested a significant erosion in the safe-haven appeal of gold, "traditionally a weak and very temporal geopolitical hedge."

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