The gold market is moving slightly lower to kick off what will likely be a very busy trading week. Global financial markets are likely to take their cues this week from any fresh geopolitical developments. Investors will also pay close attention to this week’s Federal Reserve monetary policy meeting.

 

Although no action is expected from the central bank this week, markets may be interested in the Fed’s commentary following the meeting as rate hike expectations have seen some changes. The Fed will almost certainly follow through with its plans for another rate hike before the end of the year, but some analysts have now begun to question the central bank’s plans for another three rate hikes next year. Amid criticism from President Trump and some soft pockets being seen in some key pieces of data, it is plausible that the Fed could take a bit of a softer stance towards policy next year.

 

All eyes will be on Tuesday’s U.S. midterm elections. The importance of these elections cannot be overstated, and some have suggested that the election is really a referendum on the Trump administration’s performance. Numerous key issues could be impacted by the election results, including health care, taxes, trade and more. A democratic victory in the House could set the stage for ongoing investigations into the Trump administration, and lawmakers could even demand the release of President Trump’s tax returns.

 

A democratic victory in the House could potentially be bearish for stocks. Regardless of what side of the aisle you may lean towards, it is undeniable that the market has performed extremely well over the last two years. A democratic House with a republican Senate and a republican President has the potential to fuel government “gridlock” as key issues could be voted on party lines. The notion of ongoing rate hikes and the potential for added market regulation could also weigh on equities and risk assets. In addition, the idea of further tax cuts would likely lose steam under such a scenario and investors may begin to view the market has having considerably more downside risk.

 

In other geopolitical news, U.S. sanctions against Iran go into effect today. Although there are some concerns over the potential effects these sanctions could have on the global oil market, several countries have been granted six month waivers to allow for a smoother transition away from Iranian oil imports.

 

There was some optimism late last week about a potential deal on trade being reached with China. That optimism has faded quickly, however, as Trump’s Chief Economic Advisor Larry Kudlow has said that the two countries do not have an imminent deal.

 

Financial markets could be at a key inflection point. The weight of rising bond yields, geopolitical uncertainty and an ongoing war over trade with China are just a few of the factors that could prove to be too much for the stock market bulls to handle. Stocks have already shown a significant increase in volatility in recent weeks, and the recent selling in equities could prove to be just the tip of the iceberg.

 

The gold market appears to be on solid footing at this point. The current economic and geopolitical backdrop along with an improving technical posture may fuel buying on any dips. The market is currently still consolidating recent gains, and could make a move towards key resistance in the $1245 area in the days and weeks ahead.

The gold market is starting the week off on a bit of a weaker note as improving investor sentiment has boosted overall risk appetite. Overnight, Chinese stocks were flying high and the Chinese market ended the session higher by some four percent. Chinese officials have said that they are prepared to boost the economy, possibly by cutting personal taxes. European stock market followed suit and also traded higher despite ongoing concerns over the health of the Italian economy and budget.

 

Investors will be paying close attention to a number of key economic reports and events this week. On Thursday, the European Central Bank will be meeting to discuss monetary policy. Although no action is expected on Thursday from the central bank, the press conference immediately following will likely garner some close scrutiny. ECB President Mario Draghi could potentially provide some insights as to how the central banks plans on proceeding with monetary policy. The ECB Chief could also even shed some light on his thoughts regarding Italy. The ongoing economic struggle in Italy has been the subject of much speculation, with some even suggesting that the nation could eventually leave the European Union or cause far more widespread financial problems in the region if it cannot come up with a workable budget or goes into default.

 

The ongoing U.S./China trade war also remains a source of tension this week. Presidential Economic Advisor Larry Kudlow recently suggested that China is refusing to engage on trade, and that the country is not showing any signs of willingness to meet U.S. demands that could offer a breakthrough in trade negotiations. The U.S. has already slapped tariffs on nearly half of Chinese imports, and further tariffs would almost certainly cause rising prices and an economic slowdown. While this issue may have been “swept under the rug” once again, it is a potential powder keg that could have a significant impact on risk assets and the global economy.

 

In other news that could potentially have an impact on markets, U.S. President Trump has suggested that the country would withdraw from a key Cold War-era treaty that eliminated nuclear missiles from Europe. The U.S. has suggested that Russia has been in violation of the pact, and Russia has already said that it would retaliate if the U.S. does withdraw. Although this story has not garnered much attention, at least not yet, it is a major development that could potentially reignite an arms race.

 

The U.S. will release its first estimate of Q3 GDP on Friday. Estimates are for a reading of 3.4%. A solid GDP figure could potentially give stocks and the dollar a boost, although it remains far from clear if recent economic strength will be sustainable. Numerous analysts have suggested that the current tailwinds provided by tax cuts and government spending are playing a big role in the economy, and that role is likely to falter as their effects wear off. In addition, investors will have to question what effect the ongoing rise in interest rates may have on the economy. Stock investors have already voiced some big concerns as was evident in recent stock sell-offs.

 

Whether a downturn comes sooner or later, at some point the economy will once again slow and stocks could see an end to the decade-long bull market. Looking at recent price action in the gold market, it appears that some investors are trying to stay ahead of the curve and are putting capital to work in alternative asset classes. This trend will likely continue given the current economic and geopolitical backdrop.

The trading week may got off to a somewhat rocky start, as the Columbus Day Holiday in the U.S. and Thanksgiving in Canada could lead to lower trading volumes and higher price volatility. The gold market is not kicking off the new trading week on the right foot, and has once again sunk below the psychologically important $1200 level.

 

The question many investors may be contemplating right now is whether or not increasing risk aversion will be enough to propel gold higher. Although the metal saw some strength on safe haven buying last week, it has yet to put together a significant and sustained rally. The weakness being seen in gold today may even encourage the bears to come out once again for another attempt at fresh lows.

 

The story that has dominated financial headlines in recent days has been the sharp increase in bond yields. Bonds and notes have seen a strong sell-off that has fueled a strong increase in rates, and there could be further room to run for the bond bears. The quick ascent of rates has investors taking notice, and stocks saw some significant selling last week as higher rates fuel concerns over earnings and other factors. Stocks are picking up where they left off to start the new trading week, and weakness in Chinese markets is exacerbating the situation further.

 

Despite gold moving lower today, the market likely remains at or a near a bottom. It is important for investors to keep in mind that a market bottom is a process rather than simply a low print. The gold market has been able to absorb the selling pressure around current levels, and thus far the bears have failed at carving out a fresh low. The longer the market stays within its recent trading range, the more potent an eventual upside breakout may be.

 

Numerous bullish factors remain in place to encourage buying in the yellow metal. Of particular note is the recent pickup in central bank purchases. Although central banks may see enormous value in gold at current levels, lower prices are likely not the primary reason that these massive financial institutions have increased their purchases. Numerous factors including a U.S./China trade war and Brexit may be major considerations for stepping up purchases in an effort to diversify away from the dollar.

 

Speaking of the dollar, the U.S. currency may continue to play a major role in the gold market. The greenback has been strong, and its ascent has likely been a major obstacle to higher gold prices. The dollar may be at or near a top, however, as the Fed may avoid hiking rates much further in an effort to keep the economy going. The central bank has another hike penciled in before the end of the year, and currently has another three hikes scheduled for next year.

The current economic expansion and bull market in stocks are arguably getting long in the tooth, and the risk of recession appears to be on the rise. Against this backdrop, you have to wonder just how far central banks will be willing to go in order to normalize monetary policies, and must also consider how central banks may react once the economy begins to contract.

 

Whether it is next month, next year or in the quarters ahead, rates could very well be on the decline again, taking the dollar lower with them.

The Dow Jones Industrial Average closed at a fresh record high on Friday, trading up to 26,743.50. The strong appetite for risk as well as a stronger dollar has been major factors in gold’s lack of luster. Despite numerous potential issues that could spoil the party for stock investors including an ongoing trade war and rising inflation; stock markets have remained the place to be for risk-hungry investors in search of yield.

 

A day or reckoning will come for global stock markets, however, it is very difficult to say when the levy may finally rupture. From a technical standpoint, fresh all-time highs in stocks are providing an all-clear signal to buyers and the market could see another fresh, significant move higher as markets enter a ‘melt-up” stage.

 

This week, the Federal Reserve will be having its regular policy meeting, with a decision on rates to be announced Wednesday. It is widely expected that the central bank will hike rates again by 25 bps. With another hike already baked into the cake, investors will likely be far more interested in whether the Fed will look to hike rates once more before the end of the year. As of now, it appears there is a very strong likelihood of one more 25 bps hike in November.

 

Despite the ongoing path of higher rates, the bigger picture begs the question of just how high rates may get in the current tightening cycle. Although the economy is strong and has essentially reached full employment, numerous potential roadblocks could keep the Fed from raising rates much further. Increasing chances of recession, the potential for a political shakeup in the U.S., an ongoing trade war and weakening stimulus effects could all influence the central bank’s policy decisions.

 

Although the gold market has had little to show in the way of upside in recent months, the selling pressure appears to be exhausted at this point. Another fresh leg lower cannot be ruled out, however, the market does appear to be in the process of building a longer-term base that may be constructive. The construction of a long-term base can be an extensive process, and investors should approach the market at this point with a long-term horizon in mind. The longer the market trades sideways the more explosive an upside breakout could eventually be.

 

The timing of the next economic downturn is the subject of much debate, with some analysts stating it could be years and others voicing strong opinions that the next recession will take hold in the next year or two. Given the age of the current economic expansion and bull market in equities and the likely wearing-off of the boost seen from tax cuts and government spending, the next downturn could be seen sooner rather than later. Add to this the potential for a major shakeup in U.S. politics as the midterm elections are quickly approaching and you could have a recipe for a major reversal in financial markets.

 

For the patient investor, the gold market may provide an excellent long-term value at or around current price levels. At some point, bullish fundamentals will once again fuel buying in this key asset class, and the market could enter a protracted bull market that could send prices to previous all-time highs or beyond.

As traders and investors return from the last holiday weekend of the summer, market volatility could potentially begin to pick up in the weeks and months ahead. There is certainly no shortage of things for investors to worry about right now, with mid-term elections right around the corner in the U.S. and an ongoing trade war with China and others possibly escalating.

 

The gold market has climbed back above the psychologically $1200 level, however, it remains unclear if the recent rally will be sustainable. The market does have a number of short-term headwinds working against it, including higher stocks and a stronger dollar. Economic optimism and appetite for risk have also continued to be robust, further diluting the metal’s appeal as a safe haven.

 

How much higher stocks can go and how long before the next major recession are important questions that investors have to be asking currently. The current level of complacency in stocks is in and of itself a cause for concern, as such low levels of fear in the marketplace can make it increasingly vulnerable to a significant, domino-effect sell-off.

 

Speaking of stocks, the market has been showing some ominous warning signs lately that cannot be overlooked. Of particular note is recent action in stocks and the VIX. The CBOE’s volatility gauge, often referred to as the market’s “fear gauge,” has been moving higher in union with stocks. Although this does not necessarily indicate a market crash, it could potentially point to some underlying risk aversion ahead of some key issues such as the upcoming elections.

 

Another recent warning signal that has been discussed is the current valuation comparisons between stocks and real estate. Stocks have reached a level significantly above the median home price in the U.S., and some analysts have suggested that this could also spell trouble in the months ahead.

 

Stocks also appear to be highly correlated with the news cycle at this point, and Friday’s report of another $200 billion in tariffs by the U.S. on Chinese goods sent stocks into a tailspin.

 

Although stocks may be the next major driver of gold prices, the dollar has arguably been the biggest obstacle to higher gold over the last several months. The greenback has traded higher versus a basket of major currencies, and could potentially have more upside still in the tank. The notion of two more interest rate hikes this year, as well as accelerating inflationary pressures has provided the currency with some solid support. The dollar has backtracked a bit in recent trade, however, and is vulnerable to some key issues. The Fed could take a more dovish stance this year or next, and could be in no hurry to hike rates much further. With the mid-term elections coming up as well, a change of power in the House or Senate could also have a major impact on the dollar and global currency markets.

 

With so many potential wildcards, long-term investors appear to be getting increasingly interested in gold at or around current levels. Whether or not a long-term bottom has been reached remains unclear at this point, however, the recent slowdown in the selling could be indicative of larger bargain hunters stepping in to the market at current levels. Although any further declines cannot be ruled out, such declines would likely be met with significant buying interest and prices may not fall much further than recent lows.