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In Monday’s US trading, gold prices rose to a 10-week high. Short covering, technical buying, and growing safe haven demand have been powering the recent yellow metal rally.

The momentum and technical strength shown by the gold bulls indicate that the metal would go higher from here, at least in the near term. Gold futures for December were last up $8.00 at $1,230.40 an ounce. 

Technical Upside

Last week December gold futures technically witnessed a bullish upside, which was a breakout from the previous sideways trading range.

This indicates that the uptrend in price could continue at least until the year is out. For the first time in months (actually two quarters), gold buyers are coming out confidently as they can see they have an overall technical advantage in the near term.

The next upside price breakout goal for the good bulls is to reach a close above the strong technical resistance at $1,250, while the bears have a downside breakout goal to push the price below $1,200 where the metal has a strong technical support. First real resistance in the march of the bulls would be seen at $1,240.

Risk Aversion due to Developments in Saudi Arabia

Following the global stock market upheaval of the last week, which had the US stock indices hitting a 3.5 month low, the sentiment of risk aversion still continues.

Safe haven buying interest in gold is continuing, in part because of the increasing tension between the US and Saudi Arabia over the missing Saudi journalist who was a US citizen.

Analysts worry that if the US decides to press ahead with “severe punishment” for the Saudi Kingdom, they could retaliate by pushing up the prices of crude to $100 a barrel. In the wake of this prevailing geopolitical uncertainty, the global stock markets are largely muted. Saudi Arabia has just cost itself immensely and has caused lots of people to again realize, this is an oppressive and backwards country.

Other Underlying Factors Working in Favor of Gold

The following underlying factors are also directly or indirectly helping the current momentum in gold:

• The US government’s deficit in 2018 fiscal year closed at $779 billion, the highest in six years, as per the data released by the Treasury Department on Monday.
• Retail sales across the country barely improved in September. The rebound in automobile sales was offset by the largest drop in spending at bars and restaurants in nearly two years.
• The Central Bank of Europe will end its bond purchase program in the next quarter, with minimal chances of an extension.
• International business community continues to be skeptical about China’s commitment to free trade. In the absence of on-ground policy changes in China that improve market access, President Trump’s imposition of tariffs may continue unabated.
• The government of Italy has implemented an expansionary budget for 2019, increasing welfare spending and hiking the deficit. The stage is set for a showdown with EU over compliance of EU rules.
• Data from the IMF has revealed that Poland (which is now buying natural gas from America) has increased its gold holdings to the highest levels in at least 35 years.

Persisting Geopolitical Tensions will Boost Gold

According to Price Futures Group market analyst Phil Flynn, gold is already getting some lift from the continuing geopolitical tensions this week.

The current stalemate over a possible trade agreement between UK and the European Union following UK’s exit is causing some jitters. The differences over rules concerning the country’s land border with the EU (running along Ireland) may derail the chances of a soft Brexit.  

Combined with the US government’s outrage over Saudi Arabia’s possible involvement in the killing of an American citizen, the geopolitical risk factors have escalated significantly. These complicated issues may not get resolved quickly, which will pave the way for more buyers choosing gold as a safe haven asset.

Fed’s Monetary Tightening may Act as a Catalyst for Gold

Worries over Fed’s continued monetary tightening have already caused the equity markets to slacken in the last few days. Another factor in recent days that has contributed to the market sell-off has been the decline in 10-year yield. The yield has come down from its recent 3.25 percent to 3.15 percent.

According to Bart Melek, Global Head of Commodity Strategy at TD Securities, gold could continue to rise into next year, especially as it becomes clearer how much the Fed may be willing to tighten. Melek’s target for the present quarter is an average price of $1,225, and by the last quarter of 2019, the average price should be $1,325 an ounce.

Melek said it has primarily been a dollar story because the larger central bank policy and the approach of the Fed have both worked to strengthen the dollar.

But now many investors believe that a strong dollar may not keep up for long and Fed may choose to do course correction, considering what is going on in the equity markets.

Key Takeaway

Political and economic uncertainties, volatility in the financial markets, and gradual interest rate hikes from the Fed next year may all work in favor of gold. Buyers who have been away for more than two quarters may start returning with renewed confidence in gold prices in this quarter as well as into 2019.