By David Song, Currency Analyst, DAILYFX

Fundamental Forecast for Gold: Bullish

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Gold advance to a fresh monthly high of $1768/oz as market participants diversified away from the U.S. dollar, and the bullion may continue to retrace the sharp selloff from back in September as the Federal Reserve casts a weakened outlook for the world's largest economy. Indeed, the Fed lowered its forecast for growth and inflation after maintaining its current policy, and we may see Chairman Ben Bernanke continue to talk up speculation for another round of quantitative easing as the slowing recovery heightens the risk of a double-dip recession.

According to a survey by Bloomberg News, 28 of the 32 participants polled see Gold pushing higher next week, and the bullish sentiment underlying the bullion may gather pace should the FOMC show an increased willingness to expand monetary policy further. Although the economic docket remains fairly light for the following week, a number of Fed officials are scheduled to speak next week, and dovish comments coming out of the central bank is likely to spur increased demands for the precious metal as market participants look for an alternative to the reserve currency. However, there could be a growing rift within the FOMC as policy makers see the economic recovery gradually picking up, and the committee may endorse a wait-and-see approach for the remainder of the year as it carries out 'Operation Twist.' As we expect the shift away from risk-taking behavior to carry into the following week, the flight to safety should increase the appeal of the bullion, and the rebound from $1532/oz may gather pace in the days ahead as market participants see the FOMC taking additional steps to stem the downside risks for growth and inflation.

As Gold appear to be trading within an upward trending channel, spot prices should push higher over the following week, and the bullion may continue to retrace the reversal from the record-high ($1921/oz) as the dovish policy stance held by the Fed dampens demands for the greenback. In turn, the precious metal may climb back above $1800/oz next week, but we recommend keeping a close eye on the relative strength index as it approaches overbought territory. - DS