Recent market volatility has continued, as the Dow Jones Industrial Average saw significant declines on Friday. At one point, the benchmark gauge was down by a whopping 750 points. Friday’s sell-off followed a lower open Thursday followed by an astounding rebound, with the Dow declining by some 500 points before recovering to finish higher.

 

The level of market volatility has become so great recently, in fact, that investing legend and Vanguard founder Jack Bogle commented on it during an interview with CNBC on Thursday. In a Marketwatch.com article, Bogle was quoted as having said: “I have never seen a market this volatile to this extent in my career. Now that’s only 66 years, so I shouldn’t make too much about it, but you’re right: I’ve seen a 25-percent decline in one day and I’ve never seen anything like this before.”

 

What has been fueling such stock market volatility recently? While there are a number of factors that could potentially be playing a role in the recent price swings, the notion of a global trade war is certainly at the top of the list. President Donald Trump on Thursday floated the idea of tariffs on an additional $100 billion in Chinese goods. Whether this is simply a threat or an actual plan at this point is not clear. One thing is very clear, however: The notion of a trade war with China is sending markets into a tizzy, so much so that even Treasury Secretary Steven Mnuchin has weighed in.

 

In a Friday article by The New York Times, Secretary Mnuchin was quoted as saying “There is the potential for a trade war. There is a level of risk that we could get into a trade war.”

 

Looking at the reaction by global markets, it seems like the war is already going.

 

The potential for a further escalation in already tense trade negotiations comes at a time when markets may already be at or near a long-term top. Investors are already dealing with the potential for tighter monetary policy around the globe, a geopolitical landscape fraught with potential landmines and rising inflationary pressures.

 

Reports of a chemical weapons attack in Syria on Saturday are prompting a rapid response from the U.S. and its allies. The attack could mark a significant turn of events for the Trump administration, which blamed Russia and Iran for supporting Syrian President Bashar al-Assad. The U.S. is reportedly keeping all options-including military action-on the table as of Monday. Israeli jets reportedly carried out strikes early Monday in direct response to the attack, and additional action could be taken.

 

Although the conflict was not having much of an impact on financial markets to start the trading week, any further military action or escalation has the potential to fuel risk aversion.

 

With numerous economic and geopolitical issues working against it, the stock market levy could break, and when it does, look out below. The markets have moved sharply higher following the 2016 Presidential election, and those gains are on the back of gains that have been accumulating over the last nine years or so. A significant sell-off, or reversal into a bear market, could easily see much-or even all-of those gains wiped out.

Stock markets have seen a resurgence in volatility this past week, and the recent selling pressure could be just the tip of the iceberg. The idea of a significant global trade war is weighing on investor sentiment, and the next few weeks could see some fireworks.

 

This past week, the Trump Administration announced tariffs on up to $60 billion in Chinese goods. This move came just weeks after the administration announced a new duty on steel and aluminum imports. China does not plan to sit idly by, however, and on Friday announced possible tariffs on 128 U.S. products.

 

A potential duty could be placed on a wide range of U.S. goods, although agricultural products could be hit hardest. Soybeans, in particular, could see a significant duty implemented, which could have a dramatic impact on exports.

 

The week’s tit-for-tat could simply be the opening salvo on what could become a prolonged trade war, one that could have important consequences for U.S./China relations.

 

Although the effects of such a trade war remain unclear, it stands to reason that exports suffer while prices for consumer goods could rise. If that is the case, stock markets could also continue lower as sales slump.

 

This past week, the U.S. Federal Reserve hiked interest rates by 25 basis points, bringing the Fed Funds rate to a range of 1.50-1.75%. The central bank also raised its “neutral” level on rates, which is the level at which rates are not seen as boosting or slowing economic activity. Some Fed officials remained cautious about the outlook on inflation, and there is the potential for the central bank to add a fourth rate hike this year or even implement a 50 basis point hike.

 

Whatever the Fed does or doesn’t do, it seems that the stock market could potentially be at or near the end of the bull market. If the Fed hikes rates more aggressively to stay ahead of the inflation curve, stocks would likely move lower. If the Fed doves keep the pace of rate hikes low and slow, inflation could accelerate and eventually shot beyond the central bank’s desired target of 2% annualized.

 

The big picture points to an asset reallocation, from stocks and risk assets to perceived safe haven assets. Gold has been moving higher on the threat of a trade war, and if the trade situation escalates further, more upside may be seen in the weeks and months ahead.

 

Of course, the ongoing state of geopolitics may also keep a floor under gold prices and could potentially act as significant resistance for a stock rebound. U.S. National Security Advisor H.R. McMaster was the latest to leave the Trump Administration this past week, and his replacement, John Bolton, is considered by many to be a war-hawk that could implement a much harder line in U.S. foreign policy.

 

The current shakeup is not likely over, either. More administration officials could be shown the door in the weeks ahead, at a time when the special counsel investigation into possible collusion with Russia seems to be picking up speed. In fact, there has been increasing discussion over the possibility of President Trump firing Special Counsel Robert Mueller III. If such a scenario did unfold, the U.S. could face a constitutional crisis the likes of which has not been seen before. This, in turn, could fuel a stock market sell-off that would give every major previous market crash a run for its money.

The gold market remains on the defensive, with a weakening technical posture inviting more selling. Gold has been ebbing and flowing with overall investor sentiment, and risk appetite has remained robust, for now anyway.

 

Any further dips in the price of gold should, in our opinion, be viewed as a solid buying opportunity. Although numerous analysts have been ringing the alarm bell over the years for the end of the bull market in stocks, the rally’s ninth anniversary has once again fueled some strong words of caution.

 

Now that the Trump administration has passed its highly anticipated tax reforms, Chief Economic Advisor Gary Cohn has resigned and the November midterm elections could be gearing up for some key battles, investors should be asking what may keep the current rally on track. Unfortunately for stock market bulls, that’s a very difficult question to answer. Not only might there be little left in the tank to keep equities moving higher, but several key issues are lurking in the background, issues that could not only halt the rally in its tracks but send it crashing down.

 

Recent stock market volatility, a potential trade war, higher rates, accelerating inflation, overstretched valuations and other geopolitical issues are all good reasons to be focused on one thing and one thing only: Value.

 

The recent correction in stocks could simply be the first wave of a major, long-term top. Markets do have a tendency to exhibit heightened volatility at major tops and bottoms, and another round of selling in the weeks ahead could be another major symptom of a market that has become exhausted. Not only that, but any significant retaliation on global trade or a more aggressive Fed also has the potential to spoil the party. One could argue that there are far more reasons for the market to go down rather than up from current levels.

 

The unfolding economic scenario could be considered extremely bullish for gold and other hard assets. The yellow metal may not only respond well to a more inflationary environment, but could also stand to benefit handsomely if investors begin exiting stocks in droves. And if that isn’t enough to justify higher gold prices, the dollar also remains vulnerable to a fresh and significant leg lower in value.

 

Taking an objective look at the big picture, gold may represent a far greater long-term value at current price levels compared to stocks. Although stocks may have some left in the tank yet before the bull market finally comes to an end, the potential risks of buying at current levels arguably do not justify the potential rewards. Savvy investors may not look to buy the bottom or sell the top, but rather look to play between the 30 and 70 yard lines. The stock market may right now be looking at first and goal from the 5.

 

This makes now the ideal time to consider further diversification with assets that can potentially increase significantly in value, while also possibly providing a key hedge against inflation, recession and a weaker currency.

Changing market dynamics continue to keep investors on their toes, as gold and silver fail to take out recent highs and as equities appear to be in what could be a major topping process. Although equities have recovered a great deal of ground recently, a lack of a new high could potentially point to the end of the decade-long bull market.

 

Investors remain concerned about the potential path of higher rates, but did get some degree of reassurance this past week. The most recent Fed meeting minutes released last week showed the central bank remains optimistic on the economy. Several Fed officials did, however, express concerns about upside risks.

 

Last week, the central bank presented its biannual report to Congress on the conduct of monetary policy. The report painted a positive picture on the economy, and described the labor market as being “near or a little beyond full employment.” The Fed is likely to hike rates three times in 2018, and possibly even four times. The next increase in the key interest rate will likely be seen in March.

 

A hot topic lately, however, has been how the central bank will handle the next downturn. Rates are currently in the 1.25-1.50 percent range, and are not expected to rise beyond three percent during the current expansion. This could potentially present a significant problem for the Fed, if it is forced to cut rates again to stimulate the economy. To put this into perspective, the last four economic downturns saw the central bank cut rates by an average of 5.5 percent in order to provide an economic boost.

 

After the financial crisis of 2008, the central bank slashed rates all the way down to zero, and also provided additional stimulus in the form of QE. Whether or not all of the bond and mortgage-backed security buying was effective remains the subject of much debate, but the effects of sharply lower interest rates seem to be indisputable. If the Fed does not have as much room to lower rates, however, such effectiveness could be called into question.

 

Put another way, the next recession could leave the Fed without as many tools to fight it, and that could potentially open the door to a lengthy and significant downturn. Although the next recession could be quite a ways off yet, policy-makers already appear concerned about their ability to combat it, and expanding U.S. deficits may further erode the government’s ability to curb a recession.

 

The current economic expansion is already one of the longest ever, and numerous issues already point to overheating that could put an end to the recovery seen over the last decade.

 

The idea of higher inflation and higher rates have begun taking a toll on markets. Recent stock market volatility was largely blamed on rising rates-specifically the yield on the benchmark ten year note. Rates appear headed even higher, and significantly higher yields could potentially send stocks lower by double digits.

 

Markets will likely face some major tests in the weeks and months ahead, and as inflation accelerates and rates continue their ascent, investors may exit equity markets in droves while seeking out alternative asset classes. Such a scenario could act as a major catalyst for a significant bull market in gold and other hard assets.

 

The recent carnage gripping global equity markets will likely remain a primary point of focus for investors this week. Last week saw some of the steepest declines in stocks in years, including the largest recorded point drop in the Dow Jones Industrial Average. The mayhem in equities also coincided with the largest-ever daily gain in market volatility as measured by the CBOE’s VIX.

 

Investors will be heading into this week wondering if the worst is over, and a cautious tone is to be expected following recent market activity. Whether the recent sell-off represents a bottom and buying opportunity or a glimmer of more selling to come, one thing seems to be certain: The era of easy gains and non-existent volatility is over.

 

Rising bond yields have been a major story for Wall Street in recent weeks, with the benchmark ten year note yield approaching 3%. The bigger picture, however, is more alarming. Bond yields are rising, and rising rapidly, due to increasing inflation expectations. Although recent economic data shows inflation still running below the Fed’s desired 2% target on a year-over-year basis, it is not far off. In fact, the worry now is that with full employment and strong GDP data, inflationary pressures could easily exceed desired targets and become problematic.

 

The economy may already be overheating, and the Fed may be forced to act more aggressively as it looks to normalize monetary policy. Such a scenario presents several problems. Excessive inflation increases the costs of everyday goods and services, as it erodes purchasing power. Not only that, but higher inflation and a weaker dollar also eat away at real returns. On the other hand, if the central banks raises rates higher and/or faster to combat inflationary pressures; stocks could be in for a rough ride. Higher rates make bonds more attractive, and investors could elect to shift capital away from the aging and arguably overvalued bull market in stocks into fixed income which carries less risk.

 

The current headwinds being faced by equity markets could be very bullish for gold and other hard assets. The gold market could see substantial inflows as investors seek its perceived safety and look to diversify away from stocks and risk assets. The notion of rising inflation could also fuel sizable allocations into the metal, as it may potentially provide a meaningful hedge against a weaker currency and declines in purchasing power.

 

The perfect storm of rising inflation, higher rates, a return of stock market volatility and the current geopolitical backdrop could send gold not only back to all-time highs near $2000 per ounce, but could also drive a rally that goes far above and beyond making $3000, $5000 or even $10,000 per ounce not only feasible but a distinct possibility.

 

Years and years of ultra-low rates and quantitative easing have backed central banks into a corner. As asset values come back down to earth, and as central banks look to shrink balance sheets and normalize monetary policies, market volatility may increase while equity market returns decline. As central banks now battle rising inflation, any large missteps could not only exacerbate such issues but could also send risk assets into a major tailspin.