Safe haven demand could take a breather but gold targets higher highs

As global market risks have ratcheted up recently, most notably due to the increasing nuclear threat stemming from persistent North Korean missile testing, equity markets fell sharply on Tuesday while safe-haven assets, including the Japanese yen and gold, surged. As we’ve suggested previously, market concerns may ebb and flow on a day-to-day basis, but the underlying geopolitical risks currently impacting markets are highly unlikely to go away any time soon, and will most likely increase substantially going forward. This impact can be readily seen in the price of gold, which has extended a sharp two-month rally due to a combination of the noted flight-to-safety, continued weakness in the US dollar, and a Federal Reserve that seems increasingly hesitant to raise interest rates.

As the classic safe-haven asset, gold is also both non-yielding and dollar-denominated, which makes current market conditions ripe for further appreciation of the precious metal. As market risk perceptions rise while interest rates remain relatively low and the US dollar stays pressured, gold prices are prone to enjoy a mostly unfettered path higher. This has indeed been the case since early July, when gold bottomed just above $1200 and embarked on a rise towards the top of the well-defined trading range (roughly between $1200 and $1300) that has been in place since February.

Most recently, this range was decisively broken to the upside when the price of gold breached the key $1300 resistance level in late August, and has since continued to rise towards its next major target around the $1350 resistance level. While gold could see an impending pullback after nearly a 12% rise in less than two months, the dominant trend bias remains firmly to the upside, especially with current global risk factors beginning to intensify. Above the important $1300 level, which is now considered key support, any further rise that prompts a breakout above nearby $1350 resistance could see a relatively swift move towards the $1375 and $1400 resistance targets.

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