Editor's note: Fawad Razaqzada is a market analyst at Gain Capital. The article reflects the author's opinions and not necessarily the views of CGTN.

Tensions in the Middle East have intensified after a missile hit on a Gaza City hospital. Both sides denied responsibility. A planned summit between U.S. president Biden, the Palestinian president and the Egyptian president was swiftly canceled. 

There are warning signs of a potentially broader conflict in the Middle East that could pose a new threat to the global economy. Financial markets priced in these risks, resulting in significant volatility last week. Gold, for instance, saw a dramatic surge of $60 (up 3.4 percent) on October 13, reaching $1,932, with a staggering weekly increase of $100 (up 5.4 percent), marking its best weekly performance since March and highlighting its safe-haven qualities. Crude oil, too, rebounded, with Brent crude prices breaking the $90 mark and a weekly gain of 7.5 percent.

The closure of a natural gas plant in Israel on October 9 led to a 41-percent surge in European natural gas futures, making potential supply disruptions and transportation security the primary concerns in the market.

Gold outlook has been boosted on haven flows recently

Prior to the deterioration of the situation in the Middle East, gold had been struggling due to the strong U.S. dollar and rising interest rates, briefly dropping to around $1,800. However, subsequent safe-haven sentiment began driving gold prices higher.

At nearly $1980, gold is now at its best level since late August. So far, gold has found support on the back of haven flows due to the situation in the Middle East. However, with the dollar maintaining its bullish trend and bond yields on the rise again, the opportunity cost of holding gold continues to rise. Therefore, it is not going to take much to slam gold prices back down. If there’s a ceasefire between Israel and Hamas, that could be the trigger.

Judging by the way gold has rallied, it looks like investors are pricing in a sharp escalation in crisis in the region. If, hopefully, that doesn’t happen, then gold is at risk of reversing sharply.

From a technical standpoint, while, clearly, the current bullish trend looks impressive, I am wary of the fact that the metal is now looking a little ‘overbought’ in the short-term. With gold breaking short-term resistance levels of late, this has further aided the recent recovery. What I would like to see now is a period of consolidation and some give-back, just to see whether the buyers will step in to defend broken resistance levels or not.

Interestingly, gold has reached a potential resistance zone now, around $1960 to $1980. Here, the metal struggled for significant periods during the summer months. Let’s see if the sellers return here or we just slice through this zone like butter. Key support now is around $1930, the base of Wednesday’s breakout, where we also have the 200-day average converging. A closing break below this area would be bearish, in my view.

Going forward, gold may at least slow down in its path, as the dollar and bond yields might outweigh the impact of haven demand.

WTI tests support as Mideast situation remains tense

Following the 5 percent rise on October 13, crude oil prices returned some of those gains at the start of last week. However, this turned out to be a temporary respite before oil prices rose again. Clearly, the path of least resistance is to the upside following that big upsurge, so don’t be surprised if the bullish trend were to resume from around current levels.

Unlike Russia-Ukraine, this Middle East conflict does not involve major oil-producers like Russia. Recognizing the elevated uncertainty at this early stage, there has been no impact to current global oil production. We see there is unlikely any immediate large effect on near-term supply-demand balance, which tends to be the main driver of oil prices.

However, the big worry is if Iran, that earlier returned to the oil market, gets involved. Iran has said that if Gaza operations continue there would be regional escalation in the conflict.

Until the situation de-escalates, oil prices should continue to find support on any short-term dips. Even then, the OPEC’s ongoing supply cuts mean prices are unlikely to fall significantly anyway.

The key support area to watch is around $84.10 to $85.45, where WTI had found strong resistance previously. Once resistance, this area could very well turn into support, leading to another move higher. However, if oil fails to hold support here, then we could be talking about low $80s again. On the upside, resistance is seen in the region between $87.15 and $87.95, the previous support range. A break above this area could pave the way for a move towards September’s high at $94.63 and $95.00 next.

Therefore, WTI is kind of stuck between two key technical ranges here. Depending on the direction of the break, we could well see a sharp continuation in the direction of the break.

(Are you a subject-matter expert in business, economics, finance and related topics? If you would like to contribute, CGTN invites you to join our network of guest writers. Please contact us at biznewmedia@cgtn.com. To discover more of the latest BizAnalysis commentaries on the CGTN Business section, follow @CGTNGlobalBiz on X )