Is the next great financial crisis already in the making? That may be the question many investors are now asking, and recent economic and geopolitical developments seemingly suggest that the next major recession could hit as soon as next year.

The U.S. Fed is widely expected to clear the way for a July rate cut at its meeting later this week. A rate cut by the central bank would be the first in more than a decade and could set the stage for additional cuts in the months ahead.

An increasingly hawkish Fed had been a major risk for financial markets in recent months, but the central bank has now done a major about-face and turned increasingly dovish. The problem is, any action taken by the central bank may not be enough to stop the next financial crisis.

Among the key risks faced by global markets is the ongoing U.S./China trade war. Thus far, neither side has been willing to blink and hopes for some progress being made at the upcoming G20 meeting appear to be fading fast. If the situation escalates further, both nations could impose additional tariffs or take even more drastic measures. Imagine, for a moment, that China decides to close its markets to U.S.-based multinationals like Apple.

Such a scenario would be enough to send shockwaves throughout the global financial system and there would be little, if anything, that central banks could do to right the ship.

The war on trade isn’t the only problem. Oil poses another potential risk that could have a ripple effect on global markets. The U.S. has taken a hardline stance with Iran, and rhetoric between the two nations has grown increasingly tense. Last week, two oil tankers were attacked in the Strait of Hormuz, a key shipping lane that is one of the globe’s most strategically important choke points. Any shocks to the oil market could see prices increase rapidly by $7 to $10 per-barrel.

The combination of increasing tariffs and higher energy costs could potentially have a significant impact on disposable income. As consumer spending sees a sharp decline, companies would also likely begin to cut back on hiring, investment and expansion plans. This could set off a chain reaction that could force the global economy into recession despite any further action from the Fed or other central banks.

Clearly, some investors appear to be getting the message. The risks to the economy are on the rise, and now may be the ideal time to add diversity and to cut down on equity market exposure. Money managers have been increasing their bullish positioning in gold for the third straight week, and the market has seen an increasingly bullish technical posture.

The market is vulnerable to a pullback at this point, however, and some back-and-fill trade may even be a good thing before the market attempts to push higher. Against the current economic and geopolitical backdrop, gold appears poised to continue its recent ascent. The only major potential roadblock at this point could be if the Fed does not meet increasingly dovish expectations. Even if that is the case, prices are not likely to fall far, and investors may be happy to scoop up the metal on any significant dips.

The gold market is on weaker footing in early action Tuesday as traders return from the long Memorial Day Holiday. Stronger stocks and a higher dollar are likely the primary culprits behind the selling today, and the market may see increased technical selling pressure if prices dip below the $1270 level.

 

The gold market has not seen a fresh leg lower in recent weeks, as any dips have thus far been aggressively bought. Patience on the part of buyers may be rewarded in the weeks and months ahead, however, as numerous issues come into focus that could drive demand for gold and other safe havens while putting a major dent into risk appetite.

 

The state of the U.S. economy will be a major influence on the markets and could potentially fuel a major reversal in equities. Although the economy remains strong overall, there have been some serious cracks showing up that could be cause for concern. Key indicators such as retail sales and factory output both declined in April. Durable goods orders also declined, further suggesting the economy is losing momentum. Several forecasters have already revised their Q2 GDP estimates lower, and any further disappointments in the data stream could force the Federal Reserve to spring into action.

 

Also adding to investor angst is the ongoing U.S./China trade war. After reportedly nearing a deal last month, talks fell apart rapidly. There are currently no scheduled meetings for President Trump and Chinese leader Xi Jinping to try to reach an agreement, although there is some optimism that the two leaders will have a chance to talk at next month’s G20 summit in Japan. Some reports have suggested, however, that the two sides are too far apart for a meeting to be productive at this point. China seems ready and willing to take a wait-and-see approach to negotiations, and the war over trade could escalate further with a lack of progress.

 

Other issues that could potentially fuel demand for gold include the ongoing uncertainty over Brexit, European elections, North Korea and Iran.

 

With the recent resignation of Prime Minister Theresa May, the ongoing Brexit saga has gotten even messier. Although the gold market has not shown much interest in Brexit thus far, that could change in a hurry if a no-deal Brexit looks likely. Recent elections may suggest that the next Prime Minister could be willing to leave without a deal, and tensions could rise further as the October 31st extension date gets closer.

 

The dollar may also play a key role in the weeks and months ahead. The greenback has been stubbornly hovering near its recent highs around the $98 level and has thus far not shown much weakness. That could change in a hurry, however, as the Federal Reserve could be forced to start cutting rates. In addition to an increasingly dovish Fed, the currency could also come under pressure as the effects of tax cuts and government spending fade further.

 

Looking at the bigger picture, there are numerous issues at work that could benefit gold. Given the likelihood of another recession, a no-deal Brexit and a further escalation of the war on trade, it may simply be a matter of time before gold sees a sharp and significant upside breakout.

 

The gold market is finally seeing some significant flight-to-safety buying as the sell-off in stocks accelerates. In early action Monday, the benchmark Dow Jones Industrial Average is down by some 550 points for a decline of over 2 percent. The recent string of declines has been attributed to the lack of a U.S./China trade agreement and at this point a deal, which was previously reported to be imminent, appears to be a ways off.

 

The lines of communication will remain open; however, it is also possible that not much happens until President Trump meets with Chinese leader Xi Jinping. The two could potentially meet at next month’s G20 summit in Japan. For the time being, however, the two nations have again ratcheted up the war on trade. Last Friday, the U.S. hikes current tariffs on $200 billion of Chinese goods from 10 percent to 25 percent. China has now retaliated, saying that it will raise tariffs on $60 billion of U.S. goods starting June 1.

 

In addition to stoking significant market volatility and equity declines, the effects of the ongoing war on trade may potentially benefit gold in other ways. It has been suggested that the trade war could force the Fed to cut interest rates. Such a scenario does make a great deal of sense, as the war on trade could hurt the jobs market and put a major dent in consumer spending. An increasingly dovish Fed could weigh heavily on the U.S. currency, making gold less expensive for foreign buyers. The dollar may also be negatively affected if volatility expands further. The dollar is lower today, for example, as buyers flock to the perceived safety and stability of the Japanese Yen.

 

Rising tensions between the U.S. and Iran could also potentially impact global markets. The conflict has called into question Iran’s commitment to the 2015 nuclear deal it signed with several UN Security Council members and Germany. President Trump pulled the U.S. out of the deal last year and has re-imposed sanctions. Iran has reportedly indicated it may resume nuclear activities if other partners go along with the sanctions. The U.S. recently dispatched a carrier group to the region and tough rhetoric between the two nations is on the rise.

 

The gold price is up over $11/oz in early action. The market’s technical picture has improved significantly in recent weeks and a near-term bottom may now be in place. This would seem to suggest that the market is in position to trade sideways to higher, and that any dips will be bought.

 

Despite an improved technical posture, however, the market will need to maintain some gains to foster further upside. The metal has been frustratingly range-bound for some time now even as U.S./China relations become increasingly strained. The bulls will need to take out psychological resistance at the $1,300 level and then take out the April high around $1,314 to really get the ball rolling.

Out of the challenges faced in recent weeks, some positives have emerged. Despite having to contend with numerous, potentially negative headlines, the gold market has shown some significant resiliency and could be set for a bounce-back in the sessions ahead.

 

Worries over a global slowdown have continued to dissipate, at least for now. Last week, the U.S. reported a very respectable 3.2% GDP figure for the first quarter and other key data points have also pointed to economic strength. Stocks have come roaring back to life, as key benchmarks have carved out fresh all-time highs. Appetite for risk appears to be robust and market volatility continues to decline.

 

On top of this, the dollar has also recently hit a two-year high. The stronger greenback has likely been a major factor in the lack of upside follow-through in gold and the currency could potentially have further room to run if the data stream remains strong.

 

The combination of encouraging economic data, higher equities, a stronger dollar and a lack of risk aversion would normally spell trouble for the yellow metal. That did not occur this past week, however, as the metal rebounded from recent lows. Gold has now climbed back into a previous support region from $1280 to $1290 and could potentially target further upside this week.

 

The last several sessions have shown some core-strength in gold and could potentially be indicative of a bottom having been reached. The next several sessions will be key, however, as the metal must now continue to move higher to negate recent chart damage and technical selling.

 

For the patient, long-term investor, the recent dip in price could potentially prove to be an excellent buying opportunity. If gold is able to withstand all of the negatives thrown at it this past week, just imagine how it may perform once market dynamics change. At some point, they will, possibly in dramatic fashion.

 

There is simply no telling just how much stocks and the dollar may have left in the tank. Both could have further room left to run higher before they finally top out. It is difficult to picture a scenario, however, in which both stocks and the dollar continue to rise together. As the dollar strengthens, U.S. equities become more expensive to foreign buyers. Not only could a strong U.S. currency weigh on equities, but other factors such as the Fed and current valuations could also cause investors to begin to shed stocks.

 

The dollar is likely continuing to enjoy the benefits of tax cuts and government spending along with ongoing issues in Europe and elsewhere. These trends are not likely to continue indefinitely, however, and once the sugar-high wears off the currency could come under pressure. In addition, and increasingly dovish Fed could also potentially weigh on the currency.

 

The gold market appears to be in its comfort zone for the time being and has shown little interest in probing lower levels. The key 200-day moving average, currently in the $1267 area, has provided some market support thus far and may keep a floor under the market as the bulls attempt another rally.