(Kitco News) – For the second week, gold has been caught in a narrow range and analysts expect more of the, at least until markets hear what Fed Chair Janet Yellen has to say in Jackson Hole.

December Comex gold futures are preparing to end another lackluster week with prices last trading at $1,347.20 an ounce, up 0.28% on the week. In total, gold trade in a less than $24 range this past week.

Yellen will be speaking at the annual central banker conference in Wyoming and markets will be anxious to get some much-needed guidance on future interest rate hikes.

The recently released minutes of the July Federal Open Market Committee meeting showed a strikingly accurate reflection of sentiment in the market, as the committee was split on whether the central bank should raise interest rates later this year.

Despite the growing specter of a rate hike later in the year, Jessica Fung, commodity analyst at BMO Capital Markets, said gold is holding ground because there is still some doubt as to whether or not the U.S. economy can support monetary normalization.

“If you look at the latest economic data, it hasn’t been great. It hasn’t been bad but it’s not great,” she said. “Nobody is going to commit to a bearish position in gold because there is so much uncertainty out there.”

While markets will be on edge ahead of Yellen’s statement, other analysts noted it won’t be enough to clear up the distrust the central bank has already created.

“They have a habit of coming out hawkish but then act dovish by not raising rates,” said Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the In Gold We Trust Report. “The Fed has lost a lot of credibility in the last few months. I don’t think there is anything Yellen can do to change that.”

Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital, said that disappointing U.S. and global economic data will limit the Fed’s options. He added that gold could do well in an environment where the U.S. central bank will have little room for anything but one “token increase.”

What Do The Markets Say?

Although the latest Fed minutes showed a split in support for interest rate hikes, recently hawkish comments from a range of Fed officials have helped push market expectations modestly higher.

CME 30-Day Fed Fund futures are pricing in only an 18% chance of a rate hike in September, up from 15% seen Thursday. Expectations for November has risen to 25%, up from the previous level of 20%.

Markets are once again pricing in a greater than 50% chance of a move in December. By February, markets see a 54% chance of interest rate being at least 25 basis points higher. Analysts have noted that the U.S. central bank has never hiked rates unless expectations were above 50%.

However, Fung said she remains optimistic on gold as the market has been able to hold support in an environment of rising rate expectations. Still, she expects the market to remain in limbo as there is no other major event in the immediate horizon that will drive prices higher.

“There is no reason why we shouldn’t stay here for a while,” she said. “Just because it is unprecedented doesn’t mean we can’t get caught up in a new paradigm for a while.”

Levels To Watch

Some analysts said they are not ruling out the chance of a bigger correction in the near-term.

In a report Friday, commodity analysts at Bank of America Merrill Lynch warned that elevated speculative long positions raises the risk of a contrarian short trade in the near-term. However, the bank remains optimistic on gold as they still expect investor demand, especially in gold-backed exchange- traded products, will push gold prices to $1,500 an ounce by 2017.

Stoeferle agreed in that prices could fall in the near-term, but still thinks the gold’s party is just getting started.

“I don’t care if prices go down to $1,300,” he said. “There is so much money parked on the sidelines and those investors are just waiting for a dip to jump in.”

According to some analysts, the first support level to watch is around $1,340 an ounce, which has held since late July. Analysts at iiTrader.com noted that a break of this support level should lead to a test of the next support range between $1,319.30 and $1,316.60 an ounce.

Joshua Mahony, market analyst at IG Markets, said that he is bullish on gold as he expects prices to breakout on the upside from its triangle pattern. However, they are watching initial support at $1,346 and then at $1,342 an ounce.

Trade Of The Week

Trade gold through options, where losses can be limited, suggested some analysts.

This week’s play once again comes from Saxo Bank:

In a report published earlier in the week, Ole Hansen, head of commodity strategy, said he sees a growing risk of a correction in gold in the near-term and is recommending  a short options spread.

He suggested investors buy one September GLD 125 put, and sell one September GLD 130-123 call spread.
The total cost is 0.76 cents – 1.40 for the put minus a 0.64 credit for the call spread.

The trade has a 44-day time horizon.

Total risk of the trade is $2.76 if price rises above $132 a share.

The target of the trade is a move towards $123.15 a share or lower.

“This is a dynamic trade as the value of the low delta put will rise progressively should the expected price weakness unfold, not least considering the expected pick-up in volatility. On that basis, we do not expect to keep the trade to expiry,” he said in his trade recommendation.

Data, Data, Data

Although the spotlight will be on Jackson Hole and Yellen at the end of the week, the economic calendar will see the release of some important data. The week will kick off with preliminary manufacturing data and housing sales numbers. Investors will also want to watch durable goods numbers for June. Finally, the week ends with the second print of second quarter gross domestic product and Yellen’s speech.

By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow @Neils_C