Gold slips, but on track for stellar week

Selection of gold coins at London auction house.
Getty Images

The price of gold eased on Friday but was on track to post its best weekly gain in three months, with analysts contemplating whether the precious metal is on the brink of a new breakout.

Gold rose 3.3 percent on Thursday, its biggest one-day rise in nine months. It managed to cross the psychologically important $1,300-an-ounce level to hit $1,321. On Friday, the yellow metal was trading around $1,307, having lost $11 in morning trade.

While the Federal Reserve's more-dovish-than-expected tone coupled with escalating tensions in the Middle East contributed to gold's recent jump, it was largely driven by short covering, say commodity strategists.

"For gold, I think the behavior of the price move suggests it was largely short-covering. The U.S. dollar was a little weaker overnight, but also U.S. treasury yields moved higher, which would usually see gold lower. This makes me think it was an isolated move," Victor Thianpiriya, commodity strategist at ANZ told CNBC.

Read MoreSchiff now selling gold for bitcoins

Going forward, gains are unlikely to be sustained as the demand picture looks subdued, he said, forecasting a 10 percent decline in gold to $1,180 by year-end.

"Chinese demand is still on the sidelines while onshore stocks of gold remain elevated and ETFs (exchange traded funds) aren't adding to existing gold holdings," Thianpiriya said.

Gold has risen 5 percent so far this year, following its worst annual performance in over three decades in 2013.

Here's what will tell you where gold prices are going

Ric Spooner, chief strategist at CMC Markets also noted the size of gold's move had "short covering written all over it". He added there's a risk investors may have overshot on the perceived dovishness of the Fed.

"Yellen has been consistent on the notion that the Fed will be guided by what happens in the economy – and we've seen an improvement in the past couple of months. So, if that continues we'll be in a situation where the market starts looking forward to the first rate hike," he said.

Read MoreWhy 'tapering the taper' could help gold: Fund manager

The Fed on Wednesday signaled it would stick with near-zero interest rate policy to support the world's biggest economy, disappointing traders who had bet on hints of policy tightening on the back of stronger-than-expected consumer price data.

The prospect of low interest rates for an extended period of time is supportive for gold as it reduces the opportunity cost of holding the non-income producing asset.

Nevertheless, gold's next moves will be influenced by developments in Iraq and the Federal Reserve's rhetoric, Spooner noted. He recommends watching key technical levels for clues on where prices are headed.

"For a view that gold is going to embark on a significant uptrend, I would want to see it move above $1,375," he said.

Read MoreBlame the media for gold's decline: Marc Faber

Stan Shamu, market strategist at IG, meantime, said with the Fed maintaining its dovish stance and Europe ready to provide unprecedented stimulus, gold has started to look attractive again. However, he recommends waiting for pullbacks before buying.

"On the weekly chart, it seems the precious metal is now facing another test with a downtrend resistance in play," he said.