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Renewed worries about the world economy have led to gold to trade above $1,200, with analysts getting bullish about the rising demand for this safe haven yellow metal.

McKinsey Expert Favors Gold

Ken Hoffman, McKinsey’s senior expert for Basic Materials Practice, said that a growing US deficit combined with a continued increase in printing of money could result in a boost for gold demand.

Hoffman said on the sidelines of the Denver Gold Forum that continually increasing deficits in the US economy and endless printing of money are two factors that influence gold prices favorably.

Concerns about the Italian Economy

New concerns about the overall economic health of the EU amid the emergence of an anti-establishment government in Italy became the trigger that is pushing up the price of gold. As jitters around the financial picture of Italy spread to the broader financial markets, the prices of the precious metal rose quickly, closing at their highest level in two weeks.

Adrian Ash, research director at BullionVault said that the sudden spotlight on Italy’s massive public debt has resulted in precious metal bears getting burned.

The Italian government has proposed a budget deficit that is three times higher than what was proposed by earlier governments. The European Commission has raised concerns over these budget plans of the new government in Italy.

Impressive Gold Rally

The sharp gold rally indicates that hedge funds and other speculators who had been betting against gold bullion have gone for rapid short-covering. Tuesday’s rally briefly positioned settlement of gold futures above the 50-day moving average of $1,207.44. This has not happened since April.

According to Mark O’Byrne, director of research at GoldCore, the strength displayed by gold on Tuesday is impressive, considering the fact that dollar is not getting any weaker. Gold is highly oversold and due for a bounce, according to O’Byrne. He believes that the bearish trend in gold has bottomed out, and a higher weekly close this week would augur well for October and for the entire last quarter.

Interest Rates – A Key Driver

Apart from the immediate safe-haven boost in demand, interest rates continue to be a key driver for gold. Gold is sensitive to Fed interest rate hikes because these hikes can push up bond yields, resulting in a reduced demand for non-yielding bullion. Dollar tends to get a boost in this situation, which makes gold bullion costlier for international buyers who use other currencies.

Analysts expect the Fed to raise its benchmark rate for the fourth time in December. The payrolls data (its wage component, in particular) this Friday could determine expectations for any further tightening.

Jerome Powell, Chairman of the Federal Reserve said on Tuesday in Boston that he does not expect inflation to rise despite the low rates of unemployment. He went on to defend the strategy of the Fed to gradually increase short-term rates.

Bloomberg Intelligence Expects $1,400 for Gold

According to BI (Bloomberg Intelligence), gold has been going through a phase of waiting for the dollar to move. BI believes that the dollar will start declining soon, and that will trigger a much-awaited rebound in the price of the yellow metal.

Mike McGlone, the senior commodity strategist at BI said that if the dollar rally resumes, precious metals will find it hard to recover.

However, this firm does not see that happening. McGlone said in Bloomberg’s commodity outlook for October that there is little likelihood that the US dollar will sustain itself above a 14-year high. The risk-reward equation seems to favor precious metals longs at the current levels.

The rebound in gold prices could occur fairly quickly. McGlone says that the fourth quarter could be a possible timeframe for gold to move up. BI is noticing signs that the markets are looking at a rather unfavorable end-game for the US dollar. According to them, the current upside potential in gold outweighs any downside risks.