Dollar pain may spell further gains for gold

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As the inverse relationship between gold and the U.S. dollar strengthens, the yellow metal appears to be on track for firm gains in the final three months of the year as the greenback heads south, strategists say.

U.S. nonfarm payrolls for September - released on Tuesday following a delay due to the partial government shutdown - came in at 148,000, well below expectations of 180,000. The reading boosted gold prices 2 percent to a three-week high of $1,344 per ounce, while the dollar index tumbled to an eight month low.

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Analysts told CNBC that the inverse relationship between gold and the dollar is strengthening, which is good news for battered gold prices given expectations that the Federal Reserve will maintain its monetary stimulus for longer than previously expected.

"The relationship between gold and the dollar never really went away, it just stretched its friendship," said David Lennox, resources analyst at equity research firm Fat Prophets.

The inverse correlation between gold and the dollar weakened amid the tapering fallout, which saw gold decline around 1.8 percent from late May to mid-June, while the dollar index fell around 2.8 percent over the same time period.

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According to Lennox, now that this correlation is gaining traction again, gold could see a rally to $1,500 per ounce by year-end on further dollar weakness.

"For the U.S. government to address its budget issues, it will have to spend less on programs and shrink in size within the U.S. economy. If this happens the U.S. dollar has no other direction to go but down... This U.S. budgetary issue is key to the whole gold scenario," he said.

Why you should buy gold

Sean Hyman, editor of the Ultimate Wealth Report told CNBC Asia's Squawk Box on Wednesday, that he also expected gold to rally as the greenback weakens.

"We'll see the dollar continue to drop. It's broken a two year uptrend line - that's very significant so I think the draw down in the dollar will continue to push gold up," he said.

Hyman added that there were several other supportive factors for gold, including an end to some of the large investor outflows from precious metal seen in recent times, including the reported heavy outflows from gold-backed exchange traded fund (ETF) the SPDR Gold Trust on Monday.

"Most of the people that have fled gold ETFs, for the most part, have [already]. Physical demand is very strong," he said, adding that physical demand from Singapore, China and India remained resilient in his view.

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"Gold tends to do well between well between October and the end of the year. [There's the] Indian wedding season, holiday seasons in U.S. and a lot of other countries so a lot of gold jewelry buying so I think it's well supported here," he added.

"Someone is rotating back into gold, as it's been in a downtrend all year," added Scott Redler, chief strategic officer at "At this point gold has its best chance to outperform into the end to the year... You could have a little bit more in your portfolio because it could act better as the dollar weakens."

Gold prices traded at around $1,338 per ounce at lunchtime in Asia on Wednesday.

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie