The gold market is seeing a bit of a bounce in early action Monday to kick off the new trading week. Trading volumes remain subdued, however, as many investors wrap up late summer vacations.

 

The gold market is likely seeing a bounce today as investors seem more optimistic about the potential for a trade deal being worked about between the U.S. and China. Not only that, but it has been reported that some Chinese economic officials are looking to stimulate spending on some infrastructure projects. As one of the globe’s largest commodity consumers, any good news out of China could be viewed as being bullish for the precious metals sector.

 

The gold market is likely to see some significant bargain hunting interest at or near current levels, and it has been reported that physical demand is already picking up in key Asian markets. Although recent declines may attract more buyers, the market may require some significant catalyst to mount a sustainable rally from current levels. A stronger dollar, conflict over trade and strong appetite for risk have all weighed heavily on the yellow metal, and a significant change in current market dynamics will likely need to be seen before gold is able to put in a long-term low.

 

The recent issues in Turkey and the nation’s currency have rattled global financial markets, but have thus far not driven any significant buying in the gold market. Although investors have thus far done a good job of looking the other way, any signs of contagion could once again send waves through global stock markets and potentially fuel safe haven buying in gold and other alternative asset classes. In addition to Turkey and emerging markets risk, there are numerous other geopolitical powder kegs that could also send buyers flocking to the perceived safety of gold.

 

If things are quiet on the geopolitical front this week, and that’s a big “if,” markets may turn their focus to the annual Federal Reserve symposium being held in Jackson Hole, Wyoming later this week. Hosted by the Kansas City Fed, the symposium could potentially shed some light on key economic and policy issues that could have a significant effect on markets. Although the Fed has been planning on another rate hike taking place next month, a fourth hike before the end of the year is now less certain. Markets will also be looking for clues as to when the current tightening cycle could draw to a close, as some are now speculating that rates may not be headed to previously anticipated levels.

 

Any way you slice it, sentiment surrounding the gold market is decidedly negative. There are significant short positions in the market currently, and traders seem to be looking to aggressively sell any decent rallies. Markets can only go down for so long however, as eventually there is simply no one left to sell. The market could be getting to a major capitulation point, and that could make current levels a very attractive place to buy for the patient, long-term investor.

The gold market continues to see selling pressure as the market searches for a bottom. Although the big, round $1200 per-ounce level is not far off, the market may need to do more work on the downside before it is able to build a long-term base. Low summer trading volumes and scant risk aversion are not doing the market any favors.

 

The issue of global trade remains at the forefront of investors’ attention, and Iran could potentially be the next major geopolitical shoe to drop. The Trump administration has decided to bring back sanctions against the country that were previously lifted during the Obama administration. There has already been some tough rhetoric between the two nations, and it has been reported that Iranians are buying and hoarding gold for fear of an economic collapse in the country.

 

The U.S. Federal Reserve met recently for its regularly scheduled policy meeting. The central bank, as expected, did not take any action at this last meeting. It did, however, set the stage for another rate hike next month. Despite some recent commentary from U.S. President Donald Trump, the Fed appears ready to stay the course with its plans for another two rate hikes this year.

 

The central bank may, however, need to reconsider its plans for next year. Currently, the Fed has penciled in another three rate hikes in 2019, but whether or not it actually follows-through on those plans is quickly becoming a topic of debate. The effects of a potential trade war, higher oil prices and other issues could potentially alter the bank’s rate trajectory.

 

As the gold market hovers around a 12-month low, the dollar index is hovering around a 12-month high. This is almost certainly not by coincidence, and dollar strength seen in recent months has likely played a major role in gold’s lack of upside. The dollar could quickly be approaching a top, however, as the economic effects of tax cuts and fiscal spending begin to wear off. With the U.S. running massive fiscal deficits, the dollar could eventually roll back over and embark on a significant leg lower.

 

On Friday, the U.S. will release the latest reading on consumer prices. The Consumer Price Index, or CPI, will likely show a rise in the month of July that is consistent with a pickup in inflation. A rise in this key gauge would almost certainly cement another two hikes from the Fed this year. This, in turn, could keep the dollar supported for the time being and keep the gold market on the defensive.

 

Sentiment surrounding the gold market is decidedly bearish, and could be approaching an extreme. According to recent CFTC data, hedge funds continue to pile into the short gold trade. Short positioning increased for the fifth week in a row, and the bulls have not had a lot to cheer about in recent months. This does, however, make the market ripe for a short-squeeze rally that could potentially shake out many of the current shorts.

 

Such a rally could prove to be short-lived without a change in current market dynamics. That being said, however, gold prices at or below current levels could represent an excellent long-term value for the patient investor.

Just how low might prices go? That is likely the very question on the minds of gold investors right now. The metal has not only seen a lack of upside, but has found itself under a seemingly relentless onslaught of sellers in recent weeks.

 

As gold approaches the psychologically important $1200 level, one has to wonder if buyers are ready to swoop in and put a halt to the recent slide. The market currently has a number of significant headwinds working against it, including a stronger dollar, higher stocks, rising interest rates and a general lack of risk aversion.

 

When it comes to financial markets, however, things can and do change quickly. In fact, the gold market even got a slight lift this week as U.S. President Donald Trump began to make known his concerns over the idea of additional interest rate hikes by the Federal Reserve. Although the central bank is likely to stock with its current plan of two additional rate hikes this year, the potential politicizing of the central bank could keep some pressure on central bankers to keep rates low.

 

Overall sentiment surrounding the gold market seems to be reaching a bearish extreme and that could potentially be indicative of a bottom being near, or possibly being reached already. Although the market is becoming increasingly likely to see a significant bounce in the days and weeks ahead, whether or not such a bounce is sustainable remains unclear.

 

Investor sentiment has remained stubbornly optimistic despite the beginnings of a trade war, rising inflation and the potential for higher rates. Although the gold market may see some counter-trend moves to the upside; the market may not finally reach a long-term bottom until there is a significant change in market dynamics. Stocks and risk assets may continue to move higher until they have reason not to do so. A reason could come in the form of the next recession, higher interest rates, an expanding trade war, higher oil or other economic and geopolitical factors.

 

As the aging bull market gets longer in the tooth by the day, and as gold continues to struggle, that great asset rotation could be approaching and could be closer than many investors anticipate. The U.S. economy is currently seeing strong growth, but that growth is not likely to be sustainable. Recent tax cuts and government spending programs have provided a boost, but the effects of these measures are likely to wear off at some point. With the economy already at full employment, one has to question how much more productivity may be seen before things once again reverse course.

 

Given the likelihood of the next major recession arriving sooner rather than later, the argument for buying gold and other alternative asset classes is strong. That case may be even stronger now, given the yellow metal’s recent declines. Just as those who bought stocks at the bottom following the financial crisis of 2008/2009 have enjoyed a long and sharp run higher, the potential is there for those who step in and buy gold at or near current levels to also see a significant, protracted bull market that could take gold back to previous all-time highs or beyond.

The gold market is seeing some follow-through buying to kick off the new trading week as the dollar rally shows more signs of fading. The dollar has declined to about a three-week low, and gold is likely benefiting not only from dollar weakness but also from bargain hunters and short-covering.

 

Stocks have begun the week on a strong note, with the Dow Jones Industrial Average up over 200 points in early trade. Despite the numerous economic and geopolitical issues currently being faced, investors remain hungry for risk and will likely keep buying stocks in the near-term until proven wrong.

 

The U.S./China trade war officially got underway Friday as new tariffs took effect. Although markets do not appear to be very concerned at this point, some investors are clearly taking note and expressing concern over the potential effects of a war on trade. On Friday, Bridgewater Associates founder Ray Dalio tweeted: “Today is the first day of the war with China.”

 

Dalio is no ordinary investor. His hedge fund is the largest in the world, managing some $160 billion. His tweet would seem to suggest that investors are not appreciating the possible global impact of a trade war. As both sides threaten further tariffs on trade, the situation could become far more serious in a hurry, and market volatility could come roaring back with a vengeance.

 

Also on the geopolitical front is the somewhat bizarre situation with North Korea. The ongoing negotiations between the U.S. and the country over denuclearization have taken a negative, hostile and arguably predictable turn for the worse. Fresh comments from North Korea seem to suggest that the two countries are not on the same page at all. This comes just a few weeks after leaders from both nations seemed to find some common ground and appeared willing to open a new chapter in relations.

 

The flattening yield curve may also be an area of focus for investors this week and in the weeks ahead. The curve has now declined to a level under .3%. If the two-year yield moves above the 10-year yield, it would be a strong indication that the next recession is on the horizon and could fuel a significant flight to safety in the marketplace. An inverted yield curve could force the Fed to rethink its plans regarding interest rates, and the central bank could even have to consider cutting rates again to fight the next slowdown.

 

In the meantime, the gold market could remain on the defensive as a deteriorating technical posture and bearish sentiment take a toll. Given the potential for a serious escalation in the war on trade as well as the increasing risk of recession, however, prices may not fall significantly further from recent levels. If, or perhaps when, the stock market does reverse course, the gold market could see a dramatic increase in investor interest and could embark on what may very well be the next major cyclical bull market.

Risk aversion seems to be the predominant theme as the new trading week gets off to a poor start. Stocks are getting hammered in early action on Monday, as fears over a full-blown trade war take a toll on investor sentiment. The continuing escalation of tensions over trade between the U.S. and China-the world’s largest and second largest economies-is making investors nervous, and could even lead to recession.

 

Over the weekend, U.S. President Donald Trump suggested plans for curbing Chinese investment in technology companies, while also blocking additional technology exports to China. The initiatives are set to be announced by the end of the week, and represent an even more aggressive stance by the U.S. over trade.

 

Trump has also recently threatened to implement a 20 percent tariff on cars built in the EU. Like China, the EU has said that it will respond in kind.

 

There does not appear to be an end in sight, and the issue of trade is likely to be a major factor in global financial markets in the months and even years ahead.

 

Although the battle over trade has not yet spurred safe haven buying in gold, an ongoing exodus from stocks will likely at some point fuel buying in the metal and other alternative asset classes.

 

Speaking of recession: Some analysts have recently suggested that the chances of recession by 2020 are increasing. Major tax cuts and fiscal spending in the U.S. have definitely had an effect on economic output, but some question how long the effects will last. Rising interest rates along with fading stimulus from spending and tax cuts could become a major drag on the economy in the months ahead. An ongoing trade war or even collapse of NAFTA could greatly exacerbate economic headwinds, and the Fed could once again find itself having to cut rates by 2020.

 

The next recession could be significantly harder for the Fed to combat. Although the central bank will look to its typical tools to fight the slowdown, one has to wonder how effective those tools may be this time around. The Fed Funds rate could peak below three percent in the current tightening cycle, and the central bank may not have enough room to create the “shock and awe” effect of sharply lower rates. The eventual lowering of rates again seems to be a great bet, but the Fed could also have to resort to additional measures such as QE in order to get the economy back on track.

 

The gold market remains in a downtrend, and investors appear to be exercising patience in looking for buying opportunities. Because the market has shown little upside in recent weeks, investors may be operating under the assumption that even lower prices will be seen before the market reverses course.

 

The dollar seems to be playing a major role in gold’s lack of upside in recent months, and the yellow metal could remain vulnerable until there is a significant shift in dollar sentiment. Despite the dollar’s ongoing strength, however, some retail buying has begun to emerge around current levels. With physical premiums at historically low levels currently, now may be the ideal time for patient long-term investors to add to holdings.