If market action on Monday is any indication, the trading week could be a long one. As global markets grapple with the rapid spread of the coronavirus, the markets are now being hit with an oil market sell-off the likes of which has not been seen since the Gulf War. After an OPEC deal failure over the weekend, the price of crude oil plunged by up to 30 percent on Monday as nervous investors hit the sell button.

 

The situation in oil began to develop last week. As OPEC looked to its allies to strike a deal on production cuts, Russia declined to accept a deal. This, in turn, likely caused Saudi Arabia to slash the price it charges for its oil as it looks to increase production. On Saturday, the Kingdom announced significant discounts on April selling prices. The Kingdom also is reportedly looking to ramp up production to over 10 million barrels per day, from its current production level of 9.7 million barrels per day. Some analysts have suggested that the Saudi Arabian/Russian price war began this weekend as Saudi Arabia initiated the largest price cut in over two decades.

 

The oil price war does not come at a good time for the market. Crude oil has already been under selling pressure as the coronavirus spreads and becomes an increasingly significant focal point for global markets. Adding insult to injury, not only was a production cut agreement not reached going forward, but current cuts are set to expire at the end of the month with no direction going forward. Exporters may, therefore, be able to decide how much oil they pump.

 

The oil price war, combined with concerns over coronavirus, has sent stocks sharply lower Monday. The benchmark Dow Jones Industrial Average has been down over 2000 points at the lows of the day, while all U.S. Treasury yield are now below 1 percent.

 

After trading over $30 per ounce higher in action last night following the market’s open, the price of gold has settled back down. The yellow metal is trading $1.70 higher in early afternoon action. The rise and subsequent decline of gold in recent hours may be attributed to concerns over the health of the Chinese economy, the globe’s second largest. The yellow metal may also find willing sellers as the need to raise cash increases due to market volatility and margin calls.

 

The decline in global equity markets could have a way to go. Although central banks stand ready to cut rates further or to implement other measures such as QE, the risks of an oil price war and the coronavirus cannot be overstated. U.S. equity markets are in correction territory already, and a rapid move towards bear market territory could be seen in the days and weeks ahead. Monday marks the 11th anniversary of the U.S. stock bull market, yet many are now questioning whether the run higher is over.

 

The gold market, on the other hand, could be at the beginning stages of a bull market that could last for years. Despite the metal’s reversal from overnight highs, gold could stand to benefit if stocks move lower and risk aversion rises further.

Stocks are set to open the new trading week Monday lower, sharply lower. The benchmark S&P 500 futures contract is down over 100 points, while the Dow Jones Industrial Average has declined by nearly 1000 points. It is going to be a rough open as stock trading gets going, and there is one primary area of concern for investors that may be behind today’s lower open: The coronavirus epidemic.

 

Over the weekend, the virus reportedly spread into Italy and South Korea. European stocks got hammered as worries over the spread of the disease increase. The Italian stock market, for example, declined by a whopping four percent. The equity losses were not limited to Italy, however, as German and French markets also felt the pinch of rising worries and fear.

 

Of course, the worry now is that the spread of the virus may put a major dent into global economic activity. The notion of a slowdown is not unrealistic, either, as the virus continues to spread rapidly. On Saturday, the International Monetary Fund (IMF) reportedly suggested that the virus could dent global economic growth by .1 percent and growth in China by .4 percent compared to estimates made just several weeks ago.

 

The effects of the virus are clearly being felt by manufacturing companies. Negative effects from the covid-19 outbreak are being seen in manufacturing indexes all over the globe, and many companies are now mentioning the potential impact from the virus when reporting earnings. With Chinese markets seeing major disruptions, the global supply chain is hampered, and those effects could continue if the virus spreads further.

 

U.S. stock markets remain firmly in uptrend mode, although that could change quickly with a few more days like today. Just how far equity markets may fall depends on several factors. The most important factor right now, however, may be how quickly or how slowly the virus spreads further. If the spread is slowed significantly, it may become easier for authorities to obtain a handle on it and control it. If it accelerates, however, the bottom could fall out from under global equity markets and a new downtrend could be seen.

 

The news of the spread has pressured stocks lower while boosting some safe haven asset classes. Yields on the benchmark 10-year note have fallen by several basis points, while the price of gold has climbed by nearly $40 per ounce. The rise in gold puts prices at seven-year high, and previous all-time highs are well within reach. In a sign of strength, the yellow metal is sharply higher today even as the dollar index also catches a bid higher and crude oil prices sink. In fact, most raw commodity markets are under selling pressure and could see sharp declines as the day progresses.

 

The gold bulls next target is to take out the overnight highs at $1691.70 and to then close above the $1700 level. The bears will want to see a breakdown below the $1620 region before getting too excited.

The gold market is under moderate selling pressure as stock markets move higher and risk appetite is on the rise. Fed Chairman Jerome Powell told a House of Representatives Financial Services Committee today that the U.S. economy is in a good place, even as he discussed the coronavirus and the long-term health of the economic outlook.

 

The current U.S. economic expansion is the longest on record and is now in its 11th year. Powell repeated the central bank’s view that current interest rates, between 1.50 and 1.75%, are appropriate to maintain growth. The outbreak of the coronavirus, however, will impact economic activity in China as well as that of its trading partners. The U.S. will almost certainly feel the effects of the virus as well and it is difficult to tell how much the spread of the virus may affect GDP. Powell suggested that the Fed will have to consider whether the effects will be persistent enough to warrant a material reassessment of the economic outlook. He reportedly stated that it is simply too early to know at this point.

 

Powell also discussed labor market conditions and suggested that the labor market has remained strong. He also suggested that companies are increasingly willing to hire workers with less skills and to train them, which could be indicative of labor market gains spreading to more groups. Powell did, however, also cite some concerns over the labor market. He discussed disparities being seen across racial and ethnic groups and suggested that individuals in their prime working years are not being seen in the same force as in other countries.

 

Of note is the fact that Powell reportedly warned about the increasing and massive fiscal deficit. He reportedly suggested that putting the nation on a path towards a balanced budget when the economy is strong would allow for flexibility to fight the next economic downturn.

 

Although the gold market may remain vulnerable to changes in risk appetite as well as headline risk, the bigger picture for the market remains solid. Ongoing geopolitical uncertainties, rising sovereign debt levels and an aging expansion and equity bull market are all issues that could keep gold on the offensive in the months and years ahead. Household debt is also becoming an issue. It was reported today that U.S. household debt reached a record $14 trillion. Of concern is the fact that credit card borrowers have continued to go into delinquency in rising numbers, a trend that has been in place since 2016. The increase in credit card delinquencies could be due to student loans, as more and more borrowers are unable to service their college debt or are forced to do so at the expense of other debt types. The gold market could potentially spend more time trading sideways as it prepares for a large upside breakout. The bulls are targeting a breakout above the $1600 region on a closing basis, while the bears are looking for a breakdown below $1550 and then $1500 to attract further selling momentum.

The gold market is gaining further ground as the new trading week gets going. Fears of the coronavirus from China are on the rise, as new cases have been identified and as travel restrictions have been implemented. This week is also the Chinese Lunar New Year Holiday, the biggest Chinese holiday of the year. Authorities have reportedly extended the holiday break by two days in the hopes that people will stay home longer.

 

Stocks are taking it on the chin today. At the session lows, the Dow Jones Industrial Average was down over 400 points for a decline of about 1.5 percent. The spread of the coronavirus may not actually be the prime catalyst, however. Stocks have become arguably overstretched in recent months and investors have been awaiting the next major “panic.” This could be that “panic” that may push equity prices back down to earth and even provide a buying opportunity. Of course, a worsening of the health situation or a declaration of emergency by the World Health Organization could potentially set the stage for much larger stock market declines which could take place rapidly and systematically. That is thus far not the case, however, and stocks could drift lower until the situation improves.

 

The gold market is benefitting today as risk aversion rises sharply, and some analysts are even suggesting today that $1900 per ounce is the next logical target for the yellow metal. A rapid move towards previous all-time highs could trigger further buying interest in the metal, and a significant move beyond previous highs could be seen in short order. With no upside chart resistance, the gold market could move dramatically higher to $2500 or even $3000 before taking a break.

 

In addition to the coronavirus outbreak, the markets will also have to digest a large amount of earnings this week. The next several trading days could be a make or break point for the market, and any disappointments combined with current economic and geopolitical fears could fuel a sharp sell-off in equities and risk assets. Such a sell-off could spur additional buying in gold and could cause the metal to break out above the $1600 region.

 

In other news, recent data from the Commodity Futures Trading Commission (CFTC) showed that net bullish positioning in gold recently declined. The bulls reportedly trimmed their bullish positions in the market by three percent, and the decline was comprised of both long liquidation as well as fresh short positioning. Although difficult to point to one reason for the drop, some suggested that a calming of the Iranian situation could be behind the small decline. Other investors may be looking to close out options positions before expiration on Tuesday.

 

The gold market appears to be on solid footing but may face a key test ahead. The bulls need to extend the rally beyond recent highs and to do so on a continuous, closing basis. If the market can maintain higher trade, an increasing number of investors may look to get involved and the market could find itself on a self-sustaining run higher.

The New Year has been a busy one thus far, a trend that could be set to continue for some time. Although the gold market kicked off the new trading week on a poor note, the patient long-term investor could be handsomely rewarded. The yellow metal dropped sharply on Monday, trading lower by $14 per ounce as investor risk appetite appeared to strengthen at the beginning of the week.

 

The U.S./Iran situation has calmed, for now anyway. There has not been any more violence since last week’s Iranian missile attack on bases housing U.S. troops in Iraq. In other news, the Iranian military did admit to accidentally shooting down a Ukrainian Airlines Boeing 737 jet that had just taken off from Tehran International Airport. A spokesperson for the Revolutionary Guard stated that an operator had mistaken the plane for a missile and had made the incorrect decision to fire on it. Iran has said that it is unwilling to turn over the plane’s black boxes to Boeing, making an investigation of the crash even more challenging. If the boxes are heavily damaged, there are only a handful of countries in the world that may assist in analysis, including the United States, Great Britain and France.

 

The markets are looking forward to the signing of the “phase 1” trade deal, set to take place this week. The ongoing U.S./Chinese trade war has had a measurable effect on the global economy, and if allowed to continue, could potentially force the global economy into recession. Few, if any, details of the agreement have been made public thus far. On Monday, however, the U.S. removed China from its list of currency manipulators in a move viewed as being diplomatic in nature. The “phase 1” agreement may have little substance at all and may be more of a vehicle for defusing tensions rather than anything else.

 

Despite the potential for a long-term trade agreement being reached by the U.S. and China, a lot of fear remains in the marketplace. Fear of a global recession, increasing violence with Iran, Brexit and a Fed that is looking to stand pat on rates may all keep buying interest in gold elevated for the next several months or longer. The yellow metal appears to want to go higher and has maintained trade above the $1500 level for several sessions now.

 

Both the fundamental and technical outlooks for gold are positive currently. The market has remained in a two-month long uptrend on the daily chart and has thus far not shown any significant breakdowns. The next major target for the bulls may be recent highs in the $1590 region. A breakout above this level could not only attract additional buying interest in the market but may also force more shorts out, leading to a “short squeeze” and higher price pressure.

 

Although buying in gold has remained solid, that could potentially change if economic and geopolitical tensions change. A viable, long-term agreement on trade, for example, could push 2020 back into economic growth. This could, in turn, cause central banks to halt current easing or even begin tightening. A lack of further easing or tightening of monetary policies could have a bearish effect on the gold market. Although such issues could be months down the road, it could potentially happen and is worth consideration for long-term investors.