Author: Paul Ploumis13 Oct 2014 Last updated at 03:11:03 GMT

(Kitco News) - Gold prices eked out a higher close for the week for the first time since the last week of August as the U.S. dollar retreated following a sharp rally in the past few months.

How the dollar acts next week, along with the trend in equities and crude oil, could go a long way to influencing what happens to gold prices, analysts said. Also, gold-market watchers will keep an eye on the Indian market to gauge metal demand ahead of the Diwali holiday later this month.

December gold futures fell Friday, settling at $1,221.70 an ounce on the Comex division of the New York Mercantile Exchange, up 2.4% on the week. December silver fell Friday, settling at $17.303 an ounce, up 2.8% on the week.

In the Kitco News Gold Survey, 23 people responded this week. Of those, 10 see higher prices, nine see lower prices and four see prices trading sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.

Gold prices bounced off 2014 lows this week after testing support around the $1,180 area, a price gold hadn’t seen since June and December 2013. Analysts said short covering, which is the buying back of previously sold positions, and the return of Chinese traders from their Golden Week holiday helped return the yellow metal above $1,200.

Several traders with ties to the bullion market said physical demand started to return to gold with the dip under $1,200, but they said volumes weren’t as strong as they thought they might be.

“We’re seeing some OK demand out of India ahead of the holiday (Diwali). Outside of that, demand isn’t what it should be given where we are (price-wise),” said Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA in Geneva.

He said volumes might increase as the time draws closer to Diwali, with the main festival day on Oct. 25, but he said it is possible prices may need to slip back under $1,200 to get buyers excited again. Part of the issue is there’s so much supply available that it’s keeping premiums to loco London in check.

Robin Bhar, head of metals research at Societe Generale, said Diwali buying this year likely will be subdued compared to 2013’s volumes. First, he said, last year shoppers were eager to buy because of the huge drop in gold prices at the time. Second, the Indian monsoon was a little disappointing and that may mean less disposable income for farmers. Third, most import restrictions remain on gold.

“It’s a very different market this year,” he said.

In the futures market, traders noted a rise in open interest over the past two days during gold’s rally, which was a bit of a surprise, said Kevin Grady, owner, Phoenix Futures and Options.

“We thought prices were rising on short liquidation – and there definitely was that. But for open interest to have risen shows that there were some longs that got established here,” he said.

The new long positions suggest some market participants see gold holding the recent lows. Grady, though, said he believes there is limited upside for gold because of the strength of the dollar. The dollar took a breather here, but the uptrend is still intact.

“I’m still a little bearish. We rallied $60 off the lows, but the thing is the dollar is killing gold. I think we’re going to see rallies sold,” he said.

He pegged resistance at $1,237 and $1,253, which are Fibonacci retracement levels.

Gold also found support this week from the weakness in equities, with the Standard & Poor’s 500 stock market index falling to its lowest level in a month. Analysts said this drop in stocks bears watching as equities pulled a lot of money from the gold market in recent months.

“If the U.S. equity correction continues to gain ground, we could see gold do a lot better going forward,” said Edward Meir, commodities consultant at INTL FCStone. “However, if idle money once again washes into the stock market, looking to ‘buy the dips,’ we could see the dollar rally and undo the recent gains gold has made. Of the two scenarios, we think that the sell-off in stocks - and rising gold prices - will be the more likely scenario ahead.”

Part of the weakness in equities comes from concerns over global growth, particularly in Europe and China, rather than in the U.S. Global equity markets are down, such as the German DAX. Analysts also said the weakening crude oil market reflects this slowdown in global growth and demand.

Both Brent and West Texas Intermediate crude oil prices are under $90 a barrel, with Brent prices at their lowest in nearly four years and WTI at more than two year lows. There are some thoughts that prices may weaken further as news that Saudi Arabia, the biggest member of the Organization of Petroleum Exporting Countries is willing to cut prices, rather than curb production. Market watchers are mixed over the impact on gold, with there’s not as much of a link there anymore as has been traditionally, while others saying it’s deflationary and could pull gold lower.

“It suggests there’s no inflation… If oil (loses) another $10, gold has got to be hit. I don’t see how it wouldn’t be,” Bhar said.

On flip side, though, he added, “it helps consumers. Even in the UK we’ve seen a 10% to 15% drop in petrol prices at the pump. You fill the tank for less and spend the money elsewhere. It’s a silver lining,” he said.

Next week there will some economic data to watch for. China releases a slew of economic reports, with economists having mixed expectations on the results. The U.S. will see inflation data out next week with the producer price index expected to show falls in energy and food prices, reflecting the recent drop in commodity prices.