US gold futures finished firmer near a one-week high on Wednesday, extending the previous session's rally on the back of a dollar slump and surging crude oil prices, but negative market sentiment could cap bullion's gains.
Gold is expected to further consolidate before testing new highs after a tumultuous price drop last week had put a damper on the yellow metal's run, market watchers said.
The active US gold contract for April delivery on the COMEX division of the New York Mercantile Exchange settled up $14.20, or 1.5 percent, at $949.20 an ounce, trading between $934.70 and $952.50 - the highest level since March 19. Gold futures also jumped nearly 2 percent on Tuesday due to strong buying by funds.
"This rally that we are seeing (now) is just a corrective rally. I think it's going to have problems between $965 and $980, and you will see professional selling coming to the market at that point of time," said Adam Hewison, president of MarketClub.com, Annapolis, Maryland.
Hewison said that the chances of gold going straight up to make new highs in the next couple of weeks were very little. Soaring energy prices boosted gold's appeal as a hedge against inflation. US crude futures rose nearly $5 to $106 a barrel in afternoon trade.
The dollar slumped for a second straight session on Wednesday after an unexpected fall in US durable goods orders bolstered worries about the health of the economy. A lower dollar makes gold, which is denominated in US dollars, cheaper for investors holding other currencies.
However, dealers said that gold could run into strong resistance due to chart-based weakness and lost momentum among gold bulls. Last Thursday, the contract touched a 4-1/2-week bottom at $904.70 as investment funds cashed in bullion to cover losses in other financial markets. That was down $129, or 12.5 percent, from its a record high of $1,033.90 last Monday.
The full-scale liquidation in all commodities last week was a key psychological negative to bullion, MarketClub.com's Hewison said. Hewison also said that the key US target Fed Funds rate was close to its bottom after several aggressive cuts by the Federal Reserve, and that could support the dollar and hurt gold in the near term.
James Steel, metals analyst with HSBC in New York, told clients in a note that commodities prices, including gold and other precious metals, had ample opportunity to extend declines further during the recent correction.
"We believe that it is not an exaggeration to contend that the commodity markets last week appeared to be on the verge of a significant pullback as investors deleveraged out of a range of asset classes and, in the process, reduced or eliminated their exposure to commodities," Steel said.
At 2:15 pm EDT (1815 GMT), spot gold traded at $949.00/949.80, compared with $934.60/935.40 at the close Tuesday. The London afternoon gold fix was $946.75 an ounce.