Metals

Gold bulls undeterred as stimulus-led rally fades

Source: World Gold Council

Gold bulls believe there is still enough momentum in the market to push the precious metal's price above $1,400 in the near term – in spite of speculation that the U.S. Federal Reserve may start reducing asset purchases in October.

Just under two-thirds of the respondents in CNBC's poll of gold market sentiment (62.5 percent, or 10 out of 16) believe prices will gain this week. A quarter, or 4 out of 16, say prices will extend Friday's over 2 percent decline, while two respondents believe prices may trade around current levels.

(Read more: Here's how you'll know that the gold plunge is over)

"The latest euphoria in gold could continue in the coming days as speculative investors liquidate their short positions in futures and options further," said UBS analysts Dominic Schnider and Giovanni Staunovo. "A test of the upper bound of our three-month trading range of $1,425 cannot be ruled out, especially with the Chinese market returning this Monday from a long weekend and the U.S. debt-ceiling debate coming into focus."

 Gold is picking up off very low levels: Pro
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Gold is picking up off very low levels: Pro

However, they said potential for a move higher will be limited as the Fed will ultimately cut the pace of asset purchases before the year is over or early next year. "We believe price bouts in gold will not be lasting ones, as a higher gold price would only be sustainable if U.S. economic data softens and the start date of tapering moves well into 2014, which we do not expect," Schnider and Staunovo said. UBS has a 'neutral' recommendation on gold in the short-term and a 'bearish' view on a three and 12 month bases.

Gold bull Andrew Su, CEO of Compass Global Markets in Sydney – who has an end-month target of $1,450 for gold and an end-year target of $1,580 – said continued uncertainty over the U.S. economic outlook and looming budget battles in the U.S. would drive safe haven inflows into gold. "The elephant in the room is the U.S. debt ceiling," Su said. "The fact the Fed has delayed the tapering of stimulus is a double edged sword. It is in effect recognition by the FOMC that all is not well with the U.S. economy."

(Read more: Why Bernanke may have ended gold's bear market)

For the third time in three years, the government is eyeing a budget impasse that could force a government shutdown and possible U.S. default, The Wall Street Journal reported on Sept. 20. Congress faces an Oct. 1 deadline – the current fiscal year ends on Sept. 30. – to pass a budget or shut down the government. Assuming a budget is passed, the nation's debt-ceiling must also be raised or the Treasury will hit the borrowing limit sometime in October, the Journal said.

"We'll have the debt ceiling issues coming to a head again soon and so it's probably safer for the Fed to keep things as they are now between now and the December meeting," said Sean Hyman, Editor of Moneynews at Ultimate Wealth Report. "I expect gold to hit $1,500-$1,570 in the coming months."

Gold surged 4 percent on Wednesday, the biggest gain since June 2012, after Fed Chairman Ben Bernanke said the central bank was not on a pre-set course over its monetary easing program. The metal finished the week up about half a percent despite a 2.4 percent correction on Friday after St. Louis Federal Reserve President James Bullard said it was possible the Fed might start to cut bond purchases in October.

"I think we were all taken by surprise last week by the Fed and my continued short-term bearish call on gold was clearly misplaced against the Fed inspired rally," said Warren Gilman, Chairman and CEO of CEF Holdings. "But this rally will quickly be replaced by the perpetual concern for the 'inevitable taper' so I remain a short term gold bear."

(Read more: Gold recovery? Here's one way to play it)

IG Markets' client positioning in the gold market as of Friday showed 75 percent with open positions are 'long', or are betting prices will rise. "I'm not bullish on gold although our client sentiment would show otherwise," said Kelly Teoh, a Singapore-based strategist with IG Markets in an email on Friday, adding gold will likely consolidate within the band of $1,345 and $1,360 this week.

Though the U.S. data this week will take on heightened sensitivity as markets once again try to guess the Fed's next move, many see the debate over who will succeed Ben Bernanke as Chairman as the next key driver for bullion markets.

Current Fed Vice-Chair Janet Yellen is the frontrunner for the top job, and if she is appointed, "the likelihood for '[Quantitative Easing] eternity'" would increase under her tenure, said Eugen Weinberg, Head of Commodity Research at Commerzbank. "This is a major positive factor for gold in medium to longer-term."

By CNBC's Sri Jegarajah, folow him on Twitter @cnbcSri