The gold market is trading slightly lower in early action Monday as the new trading week gets underway. The market appears to be digesting recent gains, and a period of sideways price action is to be expected.

Recent strength in gold has lured in fresh buyers while also causing some market participants to scale back on bearish positions. According to recent data from the CFTC, large speculators have trimmed short positions by a significant amount over the last two reporting periods. This shift, uncoincidentally, comes at a time when stocks have seen heavy declines and a rapid rise in volatility.

Recent equity market volatility has been fueled by a number of factors. Higher bond yields appear to be playing a major role in the sell-off, and rates could still have room to run even higher. Worries over the Chinese economy and ongoing war on trade are also not doing stocks any favors. It is unclear whether or not markets have simply entered a needed correction, or if this is the beginning of something bigger. Many indexes have broken down below key moving averages at this point, however, and the burden may now be on the bulls to step in and buy the recent dip.

The gold market has clearly attracted byers as risk aversion has been on the rise. The strong gains in gold seem to be in direct correlation with equity weakness, which also begs the question of whether or not the rally in gold is sustainable. It stands to reason that additional equity downside could propel the yellow metal higher, although it is unclear how gold may react if stocks begin to recover as many analysts have suggested will be the case going into the end of the year.

In addition to an equity recovery, the dollar index may also play a key role in the months ahead. The greenback has weighed heavily on the metal in recent months, and could see further strength in the months ahead. With the Fed seemingly intent on raising rates further, it is difficult to come up with a scenario in which significant dollar weakness is seen until the policies of other major central banks converge with the Fed’s. Any geopolitical flare ups or some significant cracks being seen in economic data over the next few months could, however, potentially give the Fed reason to rethink its plans for another three hikes next year.

Although gold has seen some significant upside in recent weeks, the real test for the market will come as stocks look to stabilize. If the market is able to hold recent gains, investor mentality may switch from sell the rallies to buy the dips. The overall technical picture has improved dramatically, however, the market may need to see a sustained move above the $1245 area in order to attract more longs. Not only would such a move higher fuel fresh buying, but it could also be the catalyst for a much larger short-covering rally. On the flip side, the market may need to hold the $1215-$1220 area on the charts to avoid falling back into its previous trading range.

The gold market is kicking off the new trading week on a strong note, as prices are higher by over $10 per ounce. The market has a number of bullish factors currently fueling demand and thus higher prices and the recent upside could be just the very beginning of a significant bull market.

Rising bond yields have been a primary source of angst for stock investors in recent weeks, and the rapid rise in stock market volatility could just be getting started. Although stocks saw what may be a relief rally to end last week’s trade, equities are once again under pressure on Monday as risk aversion is on the rise.

The rise in yields in and of itself may not be the biggest cause for concern, but rather the speed at which rates have climbed recently. The move higher in yields may not yet be over, either. Some have suggested that the benchmark ten-year note could hit a yield of four percent before the ascent fizzles out. Such a move is still a long ways from current yields around 3.26%. If yields continue to move higher, stocks could see more and more pressure as bonds and notes become significantly more competitive.

The rise in yields is by no means the only issue currently stirring the pot. Recent geopolitical developments between the U.S. and Saudi Arabia are also likely playing a role in increasing risk aversion. U.S. President Donald Trump has said that there would be “severe punishment” if it is determined that Saudi Arabia is responsible for the death of journalist Jamal Khashoggi. The Kingdom has stated that it would retaliate if action is taken by the U.S. and the country could look to leverage its oil production if necessary.

In fact, a recent article from marketwatch.com suggested that $400 per barrel oil should not be ruled out. If the Saudi Government decides to take retaliatory action, it could potentially rock global financial markets as a rapid and significant rise in oil prices could do significant damage to global economies.

Saudi Arabia is set to host the Future Investment Initiative, a large conference referred to as the “Davos in the desert” on October 23rd. Although U.S. Treasury Secretary Steven Mnuchin is still planning to attend, several other high-profile people have decided not to attend given recent developments.

The combination of higher rates, worries over trade and now the rift with Saudi Arabia may continue to weigh on investor sentiment and appetite for risk. Although stocks may find buyers if more downside is seen, the market could very well be in the midst of a shift from buy the dips to sell the rips. Concerns over these issues may keep stocks under pressure while fueling buying in perceived safe havens such as gold. The price of gold is now at a 10 week high, and the current geopolitical backdrop and rising risk aversion could keep prices on the move. An improving technical posture may also draw buyers into the market as recent price action could be indicative of a market bottom being reached.