The gold market will likely take its cues this week from stocks, the dollar and further geopolitical developments. The metal finished last week under some pressure, and further selling to kick off the new trading week is a good possibility.

 

The potential for major U.S. tax cuts and reforms has been one of the biggest topics from Wall Street to Main Street in recent days. A 51-49 vote by the Senate has paved the way for potential action, and now it will go to the House. The notion of major tax cuts was a major running promise by the Trump campaign, and the administration appears to be getting closer to its objective.

 

Of course, the idea of major tax cuts and a decline in government revenues begs the question of how the government will finance such legislation. Major reforms could potentially be another issue that the Fed will need to take into account when plotting the path of interest rates. In order to keep an exploding deficit under control, the government may want to see rates remain low for the time being. Without the threat of a significant or sharp rise in rates, gold and other hard assets could possibly see smoother sailing.

 

And speaking of rates: The question of who may be the next Fed chief is also getting its fair share of attention these days. Although the possibility of current Fed Chairwoman Janet Yellen staying on at the central bank cannot be ruled out, rumor has it that Jerome Powell is the front runner to take over when Yellen’s current term expires. Mr. Powell is seen as being more on the dovish side of the ledger, and he would likely not veer far from current Fed policy. The idea of Powell taking over sent buyers into stocks and bonds, as investors appear comfortable that he would likely stick with the current plan for slow and incremental rate hikes.

 

The dollar gained solid ground to finish out the week, and further steps towards a tax cut may be bullish for the greenback. Further dollar upside, along with additional stock strength, may weigh on gold prices. Gold may not fall too far, however, as the yellow metal still has numerous bullish tailwinds working in its favor.

 

The current geopolitical climate may still fuel a degree of risk aversion, and an improving technical backdrop may also keep buyers taking advantage of any dips in gold. If the Trump Administration is not able to implement its planned tax reforms, things could turn sour quickly for stocks and risk assets.

 

The risk of major, new legislation being unable to pass could keep any declines in gold limited. In addition, the equity market’s resolve at current levels could also be tested. With each new all-time high in stocks, the risk of a major reversal or sudden crash could be on the rise. Any signs of stock market trouble could be bullish for gold, and could fuel a significant rally in the metal as investors seek out alternatives.

 

Gold finished higher in light action on Monday, as many investors were off for the Columbus Day Holiday. The weekend was, however, filled with action that could potentially impact gold and financial markets, and the buying seen in gold Monday was likely based on safe haven demand.

 

Over the weekend, thousands of Spaniards protested the recent vote by Catalonia to be independent. Although the events in Spain may not have a direct effect on the U.S. or Canada, they may be a cause for concern. Catalonia represents a significant portion of the Spanish economy-about 20 percent-and if the region does in fact break away from Spain, the resulting economic consequences could be significant.

 

The vote by Catalonia is just another example of troubles in the EU, and the region will likely continue to face some serious challenges. The potential for other members to withdraw, like Great Britain has, as well as some ongoing banking system troubles and high debt levels could weigh on economic activity in the region.

 

The U.S. and Turkey over the weekend got into a significant spat over visas, after a U.S. consulate staff member was arrested in Istanbul.  The U.S. froze Turkish visas over the issue, and Turkey responded by doing the same. The freeze effectively blocks travel to the U.S. for Turks, and travel to Turkey for U.S. citizens with few exceptions.

 

As if these issues were not enough on the geopolitical front, the ongoing war of words between the U.S. and North Korea also continued over the weekend. President Trump has once again hinted at military action, and other nations now appear to be drawing up plans in case war does break out. The threat of a nuclear conflict has not been this serious since The Cold War, and another missile test by the north could potentially draw a military response from the U.S. and its allies.

 

Although gold has lost ground in recent weeks, the metal is not likely to fall too far given the geopolitical backdrop. In fact, a serious escalation with North Korea could potentially fuel a massive rally in gold and other perceived safe haven asset classes.

 

Stock markets have thus far maintained their almost indifferent attitude to the potential for war with North Korea, although that could change in a hurry. Currently, stocks are not showing any significant signs of slowing down, and there seems to be increasing talk of another major leg higher in equities before the rally eventually comes to an end.

Markets have a tendency, however, to do the opposite of what is widely expected. Although the current stock bullishness may not have reached euphoric levels yet, the market could be getting closer to the point at which there is simply no one left to be long. Markets have an uncanny way of sucking in every last investor before turning-and turning hard-and the stock market could be drawing in the final wave of investors with every fresh, record close.

 

The gold market may remain somewhat range-bound in the absence of any fresh geopolitical catalyst. Once stock markets start to reverse, however, the market could see massive capital inflows that could fuel a protracted bull market.