The gold market has maintained strength, despite a recent pullback in price, and appears to be getting ready for another run to the upside. The yellow metal has several important issues currently working in its favor, including unlimited quantitative easing measures and the potential for a sharply slower economy as the COVID-19 pandemic rages on.

 

The gold market does appear to be getting quite comfortable above the psychologically important $2000 per ounce level, and it may simply be a short period of time and consolidation before the bulls stage another rapid run to the upside.

 

The weaker U.S. Dollar has been a primary catalyst for higher gold prices and could continue to serve as a key driver of investor demand. On Tuesday, the dollar traded down to a two-year low. The dollar’s weakness has been attributed to a few factors, but lower bond yields are likely the main catalyst for greenback downside. The U.S. Dollar index is getting dangerously close to falling below support levels. A decline below the May 2018 low around 92.24 could see the currency fall further, possibly reaching a swing low around the April 2018 low at 89.22.

 

Not only does the U.S. currency have to deal with ultra-low interest rates and unlimited quantitative easing, it must also deal with ongoing delays on the passage of additional U.S. stimulus measures. Delays to further stimulus could set the stage for a significantly slower third quarter in U.S. economic activity, and that weakness could keep downside pressure on the greenback.

 

As the dollar weakens, gold may also be seeing benefit from rising tensions between the U.S. and China, who happen to be the globe’s first and second-largest economies. The ongoing Coronavirus crisis has led to anger and distrust between the two superpowers and could even lead to a complete halt to trading negotiations. If talks were to be discontinued, the global stock market could potentially see significant selling, like what was seen months ago as COVID fears took hold, and gold could rise as additional investors seek out its perceived safety.

 

As if COVID-19, a slowing global economy and a worsening of U.S. and Chinese relations were not enough, the U.S. also has an upcoming presidential election that could send markets into a tailspin. It has been suggested by some that if democratic candidate Joe Biden were to win the presidency, stock markets could see a massive potential sell-off as investors look to go risk-off. It has also been suggested that a Trump victory could set the stage for fresh all-time highs in equities, despite the effects of the global pandemic. What many likely fear the most, however, is the uncertainty that could arrive with an election result that is contested. If Trump refuses to leave office, for example, the unknowns could fuel a sharp and significant decline in equity and risk asset prices. Much of that equity could, however, find its way into the yellow metal, driving prices further into all-time high territory.

The gold market has remained the topic of much speculation and excitement as prices have thus far maintained trade at or over the $1800 level for a few days. With the market now at a nine-year high, some are even asking about the potential for $5000 or even $10,000 gold prices.

 

Sharply higher gold prices from recent levels would seemingly suggest that an inflationary environment had taken over and that the inflation could be accompanied by significant political and economic unrest. If gold were to reach the $10,000 region, for example, it could be indicative of sharply higher prices for everyday goods and services. These substantially higher prices could keep the public from spending elsewhere, as their focus may simply be on survival. This could, therefore, result in a strong downward economic spiral that could take many years to recover from, if recovery is even possible.

 

If such a period of inflation, or stagflation, were to come to fruition in the U.S., it is highly unlikely that government personnel would put someone with the guts to put a stop to it in office. In other words, there likely will not be a second coming of Paul Volker, and the economy could be left to fight its own battles. Without strong assistance, however, that fight could continue for years or even decades.

 

As the U.S. fights the current and future economic slowdowns, it will almost certainly continue its path of holding interest rates at or close to zero while printing more money through QE. These actions will serve to weaken the dollar further and could keep the gold market on the offensive. This idea could be a major force behind gold’s recent upside and could keep the bulls out in force unless there is a major change to monetary policy.

 

In other news, U.S./Chinese relations are again a hot topic of discussion. On Tuesday, President Donald trump outlined a U.S. plan for further sanctions against China that include the removal of Hong Kong’s favorable trade status. China has, in turn, promised retaliation and could announce measures at any time now.

 

The strained relationship between the globe’s first and second-largest economies has been a major issue for global financial markets for some time. The ongoing spread of the Coronavirus and COVID-19 has put the nation’s differences in focus, as the U.S. has blamed China for the spread of the disease. COVID-19 also remains a very hot topic, as the number of infections is again on the rise. Several states, including Texas and Florida, recently made the difficult decision to once again close bars and restaurants. Some countries have also recently begun to reimplement lockdown protocols to try to contain the spread of the infection.

 

With the U.S. Presidential election quickly approaching, the fight to open or shutdown the economy could become an increasingly important topic. The Trump administration is currently pushing for schools to be open in the Fall, while some have suggested that many more closures are likely to be seen. The ongoing back and forth and unknowns surrounding the battle against the virus could keep investors flocking to the perceived safety of gold and could eventually weigh heavily on stocks and risk assets.

The markets seem to have picked up right where they left off at the end of last week. Last night saw U.S. stock index futures sharply lower, with the Dow dropping by some 700 points. Those declines did not stay, however, as investors saw opportunity throughout the trading session. Stocks are now sharply higher in afternoon trade.

 

The see-saw in equity markets has left the gold market with little to bank on one way or the other. The yellow metal is down over $5 per ounce in afternoon trade while maintaining prices well above the $1700 level. The theme for today appears to be investors worrying over a reduction in total consumer demand for precious metals due to lower economic output.

 

The notion that U.S. stock markets have come back too hard too fast is also putting a damper into the marketplace. Many people are likely wondering how the Nasdaq reached a new all-time high last week with swelling unemployment and a good portion of the economy still offline. Although stock markets do tend to look into the future, it is difficult to come up with a scenario in which fresh all-time highs for equities are justified.

 

The ongoing COVID-19 pandemic is also playing a role in markets and investor psychology. As the pandemic appears to be in the midst of a resurgence, some states are seeing a rise in new cases as the U.S. looks to get things reopened. Reported infections in the U.S. are now over two million, and a strong resurgence of the virus could potentially put the U.S. economy on hold for months or longer.

 

The economy has already seen significant damage from the virus and lockdown. The Federal Reserve recently gave a very somber outlook when it had its latest FOMC meeting on rates last week and investors are likely to pay close attention to Fed Chief Jerome Powell’s remarks this Tuesday and Wednesday on the economy during his two days of congressional testimony.

 

The days, weeks and months ahead could be vulnerable to heightened volatility across markets, especially if the amount of COVID-19 cases starts to rapidly expand further. The gold market could potentially benefit from the unknowns in the marketplace and could remain bought up on any significant dips.

 

Another bullish factor for the gold market may be recent weakness in the U.S. Dollar. The greenback is lower again today and could potentially see further selling as the U.S. Fed embarks on what could be an extended period of ultra-low rates combined with expansive QE measures. If the dollar’s sharp trend lower remains intact, it could fuel significant buying in gold and other hard assets that are denominated in dollars. Dollar weakness as well as fears of rampant inflation down the road could set the stage for a return by gold to previous all-time highs near $2000 per ounce or well beyond that level.

The gold market continues to take its cues from the stock market and global appetite for risk. As stocks rallied sharply on Wednesday, the yellow metal took a dive, dropping by nearly $30 per ounce to $1699. The decline took the metal below the significant $1700 level and could point to further weakness ahead.

 

The reading on the jobs market today by ADP may have been behind some of the selling in gold. According to ADP, the U.S. private sector shed some 2.76 million jobs in May. Although that is a very large figure, it is significantly smaller than the forecast of some nine million jobs lost and set the stage for a rally in stocks and a decline in perceived safe haven assets. Revised ADP data said that some 20 million jobs were last in April during the height of the COVID-19 pandemic as the economy essentially ground to a halt.

 

Wednesday’s ADP jobs data may lend some support to Friday’s non-farm payrolls report. Before getting overly optimistic, however, it is important to understand that these two labor reports have not always been on the same track. Today’s ADP data may not, therefore, be considered an accurate predictor of Friday’s non-farm payrolls report. Consensus estimates are looking for a decline in non-farm payrolls of around eight million. A miss on Friday could set the stage for a significant stock reversal, while a better than expected figure could pave the way for even more equity upside. The tech-heavy Nasdaq is within striking distance of its all-time highs and could see those highs exceeded with another strong day or two. The benchmark S&P 500 and Dow Jones are also not far behind and could potentially see a test of previous highs in the coming weeks.

 

As stocks move higher, pressure could continue to mount on the gold market. Although the yellow metal would seemingly have everything it needs working in its favor, a stubbornly bullish stock market could stand in the way of a test of previous all-time highs near $2000 per ounce.

 

Recent protests and rioting in the U.S. could be the next major catalyst for gold and stock markets. Protests have been going on for over a week now after the death of an unarmed African American man at the hands of a white Minneapolis Policeman. Protests have at times turned into riots. Major cities such as New York City, Chicago, Los Angeles and Washington D.C. have all seen significant criminal activities in recent days. Widespread property damage and looting have been seen in addition to fires being set. Police have, thus far, appeared to be patient and understanding of protestors. That could change, however, as the days drag on and violence increases.

 

The uncertainties surrounding the COVID-19 virus and ongoing racial protests could keep buying interest in gold elevated. In what could be a double whammy, the protests could lead to another rapid outbreak of COVID infections and a return to previous lockdown guidelines.

The gold market is slightly lower in early Monday action as key outside markets pressure the yellow metal. In early action, the dollar is higher while crude oil prices are lower. Stocks are also moving lower, with the benchmark Dow Jones Industrial Average down over 150 points in early action.

 

A major theme this week and for the coming weeks will likely be the reopening of economies, Different states in the U.S. are now attempting to reopen for business, and other areas of the world are also looking to get their economies rolling again. The reopening of areas presents several significant challenges, however, and will likely be performed at a very slow, controlled pace. A resurgence of COVID-19 infections is a major risk being faced, and should the virus start to accelerate its spread, many economies could find themselves quickly shut down again, perhaps for an even longer period.

 

U.S./Chinese relations remain strained currently. The two sides have exchanged shots about China’s handling of the virus as well as the origin of the virus. President Trump reportedly has suggested that COVID-19 may have been manufactured in a laboratory. Whatever the case may be, the initial handling of the virus and China’s communications surrounding it remain a sore spot between the nations and could even throw a major monkey wrench into previous trade negotiations.

 

As the U.S. and other nations battle against COVID-19, the notion of negative interest rates has gained steam. Although the U.S. is not negative, at least not yet, Fed Funds have at times implied negative territory in recent weeks. The argument for or against going negative is likely to continue, and Fed Chief Jerome Powell may set the record straight this Wednesday during a discussion on current economic issues online. The idea of rates moving into negative territory is likely to remain an important topic in the weeks and months ahead.

 

The gold market remains in a strong uptrend, and although prices have dipped below the $1700 level in early action today, the bulls may be willing buyers on any significant weakness. The yellow metal seems to have all the right things going for it currently, including a high degree of risk aversion, massive government debt, low interest rates and weaker currencies.

 

Although the market is taking a bit of a breather in early action today to start the trading week, the bulls will likely keep their focus on the $1800 level as the next potential target. A breakout above this level, on a closing basis, could set the stage for a return to previous all-time highs near $2000 or beyond. With little upside chart resistance ahead, the bulls could even see a rapid run higher into fresh all-time highs where the market could potentially even cover several hundred dollars of upside in a short period of time.

 

The recent forecast by Bank of America for gold to hit $3000 per ounce is not only looking increasingly plausible but also more likely.