Investors will get back down to business this week, following the Thanksgiving Holiday shortened trading week. Trading may begin to slow down in the coming weeks, as the holidays and year-end approach.

 

If you have been following the gold market in recent months, you have likely also been seeing considerable coverage of the popular cryptocurrency, Bitcoin. In fact, some analysts have even begun comparing the digital currency to gold, and some have suggested that Bitcoin and similar digital currencies are the wave of the monetary future.

 

With prices continuing to rise and reaching levels near $10,000, this really comes as no surprise.

 

Talk about putting the cart before the horse…Given the extensive coverage surrounding these products and numerous comparisons to gold and other assets, it seemingly makes sense to try to put such investments into perspective.

 

Start by considering this: Gold has been considered a reliable store of wealth and value not for years, decades, or even centuries, but for thousands of years. The yellow metal is recognized and valued all over the globe, and can be used as a medium of exchange anywhere on the planet.

 

Bitcoin and other cryptocurrencies, on the other hand, have only gotten started in the last decade and arguably still have a lot to prove. They may be vulnerable to cybercriminals, programming errors and other issues. Although some merchants have begun accepting these products as a means of payment, widespread use of digital currencies is far from a reality, and numerous challenges will stand in the way of these products becoming more mainstream.

 

Now, let’s talk about bubbles for a moment. A bubble, as defined by Investopedia, is “An economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior.”

 

Could such a definition fit the current cryptocurrency rage? You be the judge…

 

Others might define a bubble as an asset that has been inflated by speculators, and has not been purchased as a store of value. How many people that buy Bitcoin or other cryptocurrencies plan to later sell at a profit? How many believe they will sell at a large profit sometime in the near future? How many plan to simply buy and hold for years or decades to come?

 

How about this: Can cryptocurrencies provide a hedge against inflation? How about deflation? What about declining fiat currency values? Could they be used to purchase food, water or fuel in the event of a major crises? What about a massive attack on the global internet infrastructure?

 

It is very likely that the Bitcoin and cryptocurrency rage could continue, until it doesn’t. The bubble will get bigger, bigger and even bigger until the day it eventually does what all bubbles do: Pops and leaves a ton of investors wondering what just happened.

 

You worked hard for your investment dollars, use them wisely. If you are looking to add diversity to your portfolio with an asset class that may provide a hedge against a number of geopolitical and economic issues while also having the potential for significantly higher prices, gold is an obvious choice.

 

If you want to speculate on rising prices in an asset class that has no significant history or inherent value, then Bitcoin may be a great bet.

 

You make the choice. But if you decide to speculate, make sure you do so with capital you can afford to lose. 

The gold market will continue to monitor Washington this week, as the divergence between House and Senate tax bills seems to be widening. Major tax reforms were an area of focus for the Trump campaign, and a year after Trump was elected President he is trying to make good on that campaign promise.

 

The fight for tax reform is not going to be easy, as disagreements remain on some major issues. In addition, implementation of key parts of any such legislation may need to be phased in rather than being put into place with immediate effect. If the various parties involved are not able to move closer to a deal, or if it appears that any deal may take more time than originally anticipated, it could potentially weigh heavily on the dollar while providing gold a boost. Stock markets could feel some heat from further delays as well, and any signs of stocks topping out could also be bullish for gold and other perceived safe haven assets.

 

Now that President Trump has appointed Jerome Powell to be the next Fed Chair, markets will be looking for any clues on the central bank’s plans regarding monetary policy. Although Powell is widely considered to be someone who will not rock the boat, it remains unclear if he may bring any significant changes in opinion to the central bank. Investors may pay close attention to this week’s inflation data, as the latest readings on both the Producer Price Index and Consumer Price Index are set for release.

 

Consensus estimates are looking for a rise of .1% in month-over-month consumer prices, with the core reading rising .2% on the month. Year-over-year core CPI is expected to remain at 1.7%. Assuming the inflation data is in line with estimates, expectations for monetary policy are likely to remain unchanged. Any upside surprises, however, could potentially fuel speculation about a more aggressive Fed and a rethinking of current rate expectations.

 

For now, the gold market may remain range-bound in the absence of any fresh, bullish catalyst. The market has been moving sideways for some time, with both the bulls and the bears failing to make any significant headway. The longer the market remains range-bound, however, the more substantial any breakout could be.

 

Although numerous issues may potentially favor an upside breakout, the gold bulls may have more work to do before a sustainable upside move can take place. Ongoing all-time highs in stocks and robust appetite for risk continue to be major hurdles for higher gold, and it may very well take a significant stock market crash or decisive reversal in equities to fuel a substantial rally in the yellow metal. Given the age of the bull market and the likelihood of the next recession coming down the pike, meaningful downward pressure in stocks could come sooner rather than later.

 

In the meantime, the gold bulls may simply remain content buying any significant dips in price as they patiently await the next cyclical bull market getting started. 

This week could be an interesting one, as news hit over the weekend that the special counsel investigation, led by Robert Mueller, has filed the first charges in its investigation of possible Russian collusion in the 2016 U.S. Presidential election. The first indictments could come as early as Monday, and speculation over the weekend of who the target or targets may be has been rampant.

 

Anyone charged could be taken into custody as soon as Monday, and the initial charges could potentially be just the first wave of more to follow. Of particular note is the fact that the charges were approved by a grand jury, who felt there was sufficient evidence in the case to proceed. Prosecutors will typically only bring charges before a grand jury if they feel strongly about the case and the likelihood of a conviction. The initial charges have come much faster than many had expected, just five months into the special investigation.

 

It remains unclear how an indictment may affect financial markets. Of course, the target of the initial charges could be extremely important. Some analysts have suggested that the initial target or targets could be used to “flip” on others also possibly involved. Whatever the case may be, these could be the first dominos to fall and with any cooperation, the case could move ahead at an accelerated pace.

 

As the case moves forward, President Trump will either eventually be totally vindicated or shown to have been somehow complicit in the collusion. A complete vindication could potentially fuel further gains in stocks, as it would allow the President to move forward with his agenda of tax cuts and fiscal spending without the dark cloud of suspicion hanging over the administration.

 

If further investigation does point towards Mr. Trump or key members of his administration, appetite for risk could take a significant dive and stock markets could decline dramatically.

 

The gold market this week will also be on the lookout for President Trump’s announcement on who will be the next Fed chair. As it stands right now, Jerome Powell is said to be the favorite. Powell is considered to be someone who likely would not rock the boat and who would essentially stay on the current path that has been laid out regarding monetary policy.

 

Of course, any surprises could potentially have a significant impact on markets. Another possible choice, Stanford economist John Taylor, is viewed as being significantly more hawkish and would likely advocate strongly for tighter monetary policy and higher rates. A Taylor appointment could shake investor confidence, and potentially fuel selling in stocks and other assets.

 

Gold prices are approaching some significant support levels and buying activity may pick up on the current dip in price. This week could have major implications for investors, and perceived safe haven assets like gold could potentially see renewed interest. In addition to domestic issues, the global geopolitical backdrop remains supportive for gold as well, as issues from North Korea to Catalonia may keep a degree of risk aversion present in the marketplace. 

The gold market has clawed its way back higher in recent weeks, and the question now is will the momentum continue. From a technical standpoint, gold appears to have considerable room to run on the upside. Gold is still nearly $50 per ounce away from the highs seen in mid-September, however, the market has already shown that covering that type of ground can be accomplished quite rapidly.

 

The real test for the yellow metal may be whether or not it can break through the previous highs around the $1350 level and forge higher ground on a sustainable basis. Given the speed of the rally that took gold prices to those levels in just a few weeks, it did not come as much of a surprise to see gold prices decline in back-and-fill trade. Now that the market has had a chance to digest those gains, the real test of the markets mettle may be seen.

 

The gold market has a number of issues currently working in its favor, and those issues are not likely to change dramatically any time soon. The current geopolitical landscape, dollar weakness, interest rate outlook and lack of significant U.S. tax and fiscal spending legislation may keep the gold market well-supported for some time to come.

 

Although a more aggressive Fed could potentially become a major headwind for the gold market, the central bank is quite likely to remain extremely patient and accommodating as it looks to normalize monetary policy. In fact, numerous analysts have already suggested that rates will not reach previous levels during the current tightening cycle, and the era of ultra-low rates could be here to stay.

 

The ongoing lack of meaningful inflation would seemingly reiterate the idea that the Fed will not be in any hurry to raise rates. Even with the current forecast of another hike in 2017 to be followed by another three hikes in 2018, rates would still be at relatively low levels. Of course, a lot can also change between now and when the Fed looks to tighten further next year. A major stock market collapse or reversal could give the Fed reason to pause, as could any number of economic or geopolitical events. A war with North Korea, for example, could have dramatic effects on the global economy and appetite for risk.

 

The equity markets and the dollar could hold the keys to higher gold in the coming months in the absence of geopolitical factors. The rally in stocks is a decade old now and has covered a massive amount of ground. With every new all-time high, the stock market could be one step closer to a top. Once the bull market does come to an end, gold could stand to benefit handsomely as investors look for alternatives.

 

The dollar could also fuel higher gold in the near to mid-term. Low inflation levels are already taking a toll on the greenback, and a lack of a viable U.S. tax cut and fiscal spending package could potentially send the currency even lower. 

The gold market has been on the defensive in recent weeks, and the selling could potentially continue in the absence of any fresh, bullish catalyst. Whether or not the declines seen in recent sessions are just more back and fill trade following the recent rally or if it could be the early stages of a more significant sell-off remains unclear.

 

On the geopolitical front, the ongoing with conflict with North Korea has seen more back and forth tough talk and rhetoric from both sides, but thus far no new action has been taken. Over the weekend, U.S. President Trump suggested that his Secretary of State, Rex Tillerson, was wasting time trying to negotiate with North Korea. Trump seems to be of the opinion that diplomacy has already failed, and that more concrete action will be necessary to put a halt to the country’s nuclear program. Exactly what more action might look like remains unclear, but the U.S. has repeatedly stated that a military option does exist.

 

Stocks continue to make fresh all-time highs, and with no major news concerning North Korea, investors appear comfortable in risk assets. The current state of investor risk appetite could change-and change quickly-if North Korea again defies the international community and engages in another provocative act of aggression. A hydrogen bomb test over the ocean, as the North has suggested, could potentially fuel a significant flight to safety while sending markets into a tailspin.

 

Gold’s recent declines may also be partly attributed to recent commentary from the U.S. Fed. In its latest meeting on monetary policy, the Fed has suggested that it remains on track for another rate hike before the end of the year, followed by another three hikes next year. It is important, however, to keep any such action from the central bank in context. Even with another four quarter point rate increases, rates will stay be at very low levels. Some analysts have even suggested that rates are not likely to return to previous levels seen as the Fed attempts to normalize policy.

 

The Fed has acknowledged the ongoing lack of inflationary pressures, but so far does not see this as a barrier to higher rates. If inflation does not gain traction, however, the central bank may decide to rethink the trajectory of monetary policy. Simply put, rates could remain subdued for a long time yet, and the notion of higher rates will likely not become a major obstacle for higher gold prices.

 

The gold market will likely take its cues from geopolitics and the stock market over the next several weeks. Higher stocks and the possibility of meaningful tax reform in the U.S. could keep a lid on higher gold. On the other hand, any signs of a stock market reversal or any further escalation in U.S./North Korean tensions could pave the way for higher gold.

 

The U.S. Dollar index may also be a major factor for gold in the coming weeks. After seeing significant selling pressure over the last few months, the greenback is clawing its way back. A stronger dollar may also limit gold’s upside in the near-term, while a return to recent lows or beyond in the dollar could fuel a sharp rally back to recent highs in gold or far beyond.