The gold market ended last week on a bit of a weak note, as prices slumped by $5.60 per ounce in light holiday trade. As investors return to the financial markets this week, however, volumes could see an uptick as end-of-year positioning gets underway.

 

The next several weeks could see a significant increase in market volatility. The benchmark stock indexes have already shown an inability to hold a strong rally, and the CBOE’s VIX index recently staged an upside breakout on the daily charts. Unfortunately for stock investors, the markets could have a long way to fall before finding a long-term bottom.

 

One of the key drivers of recent market volatility has been the notion of rising rates. The Fed has already lifted its key interest rate twice this year and has one more hike ready to go next month. The Fed has also maintained its plans for another three rate hikes next year, although those plans are now facing some very serious scrutiny.

 

Although the central bank will almost certainly follow through with another hike at its next meeting, expectations now seem to be that the Fed will take a step back at that point and reassess its plans for next year. The central bank has faced a chorus of negativity surrounding its path towards policy normalization, and it seems more and more market participants from President Donald Trump to Mad Money host Jim Cramer are chiming in and voicing their opinions against further tightening from the Fed.

 

This criticism puts the Fed in an interesting spot. The central bank has gone out of its way in recent months to demonstrate its independence as it has asserted that further rate hikes are data-driven and remain appropriate. Recent stock market selling, however, might suggest that the Fed is moving too far too fast. Serious questions have been raised as to whether the economy can handle higher rates, and corporate valuations may need to see a much larger re-pricing given a higher cost of capital.

 

In other words, if the Fed does not back off on raising rates, recent declines in equities may be just the beginning of a much larger move lower.

 

Regardless of what the Fed does or does not do, the gold market seems to be in a position to benefit. Higher rates could send stock investors fleeing and could fuel significant risk aversion. This, in turn, could force a major asset rotation in which significant capital could find its way into gold and other perceived safe-haven asset classes.

 

If the Fed elects to hold off, or even decides to cut rates again, it could possibly buoy stocks but at the same time could fuel a major reversal in the dollar. The stronger dollar has been a major hurdle to higher gold this past year, and with that barrier removed the yellow metal could potentially see a swift and significant upside breakout. Resistance in the $1245 area remains the next upside target for the bulls.

The gold market is kicking off the new trading week on slightly weaker footing. The Veteran’s Day Holiday may keep many participants out of the markets on Monday, and price action may be dull.

 

This week, investors will once again have their hands full as they watch for any fresh economic or geopolitical developments. There are two themes in particular which may garner considerable attention: Rising inflation and falling crude oil prices.

 

According to an article from marketwatch.com, producer prices rose by .6% on higher gasoline and industrial supplies. This figure represents the largest increase in six years. The hotter than expected inflation data will likely force the Fed to continue on its current path of interets rate hikes. The central bank is widely expected to hike rates once more before the end of the year, and has penciled in another three rate hikes for next year.

 

The path of rate hikes had come under increasing scrutiny in recent months, as some key data pieces fell short of expectations and as the housing market continues to show some weakness. Even President Trump has gotten involved, making his opinion of further rate hikes very clear. The independent central bank does not appear likely to veer off its current course, however, and the PPI data is just one more reason that further tightening may be warranted.

 

The crude oil market is also another factor that could potentially shake things up. Oil officially entered bear market territory last week after dropping 10 days in a row. Such a straight decline had not been seen in the oil market since 1984.

 

Like copper, the crude oil market is often viewed as an overall barometer of economic activity. Recent price action would then seem to suggest that the global economy is not as strong as many investors think. In fact, the declines in oil could potentially be one of the effects of the ongoing U.S./China trade war. Copper has already seen major declines in recent months and appears poised for even more selling. In the current environment of rising rates and trade disputes, the combination of lower copper and lower oil could point to tougher economic times ahead.

 

China is one of the world’s largest consumers of raw goods and commodities, and the recent slowdown in the Chinese economy is certainly playing a major role in lower commodity prices. Chinese officials have already suggested various forms of action to prop up the world’s second largest economy. The question is will it be too little too late.

 

The dollar has benefited from the rising inflation data and the notion of further rate hikes. The greenback is trading at a 16-month high on Monday, and could see further gains as the week progresses. With recession and geopolitical risks on the rise, the stronger dollar appears to be the biggest hurdle to higher gold prices.

 

Gold is currently trading around a four week low, and could face a significant test in the sessions ahead. Following recent upside and a period of price consolidation, it is imperative for the bulls that the current dip is bought. The $1200 level could potentially find some buyers, and below that the previous swing lows around $1181-$1183 will need to hold. A break below those levels could potentially set the stage for a significant leg lower in the weeks ahead.

The gold market is trading slightly lower in early action Monday as the new trading week gets underway. The market appears to be digesting recent gains, and a period of sideways price action is to be expected.

 

Recent strength in gold has lured in fresh buyers while also causing some market participants to scale back on bearish positions. According to recent data from the CFTC, large speculators have trimmed short positions by a significant amount over the last two reporting periods. This shift, uncoincidentally, comes at a time when stocks have seen heavy declines and a rapid rise in volatility.

 

Recent equity market volatility has been fueled by a number of factors. Higher bond yields appear to be playing a major role in the sell-off, and rates could still have room to run even higher. Worries over the Chinese economy and ongoing war on trade are also not doing stocks any favors. It is unclear whether or not markets have simply entered a needed correction, or if this is the beginning of something bigger. Many indexes have broken down below key moving averages at this point, however, and the burden may now be on the bulls to step in and buy the recent dip.

 

The gold market has clearly attracted byers as risk aversion has been on the rise. The strong gains in gold seem to be in direct correlation with equity weakness, which also begs the question of whether or not the rally in gold is sustainable. It stands to reason that additional equity downside could propel the yellow metal higher, although it is unclear how gold may react if stocks begin to recover as many analysts have suggested will be the case going into the end of the year.

 

In addition to an equity recovery, the dollar index may also play a key role in the months ahead. The greenback has weighed heavily on the metal in recent months, and could see further strength in the months ahead. With the Fed seemingly intent on raising rates further, it is difficult to come up with a scenario in which significant dollar weakness is seen until the policies of other major central banks converge with the Fed’s. Any geopolitical flare ups or some significant cracks being seen in economic data over the next few months could, however, potentially give the Fed reason to rethink its plans for another three hikes next year.

 

Although gold has seen some significant upside in recent weeks, the real test for the market will come as stocks look to stabilize. If the market is able to hold recent gains, investor mentality may switch from sell the rallies to buy the dips. The overall technical picture has improved dramatically, however, the market may need to see a sustained move above the $1245 area in order to attract more longs. Not only would such a move higher fuel fresh buying, but it could also be the catalyst for a much larger short-covering rally. On the flip side, the market may need to hold the $1215-$1220 area on the charts to avoid falling back into its previous trading range.

The gold market is kicking off the new trading week on a strong note, as prices are higher by over $10 per ounce. The market has a number of bullish factors currently fueling demand and thus higher prices and the recent upside could be just the very beginning of a significant bull market.

 

Rising bond yields have been a primary source of angst for stock investors in recent weeks, and the rapid rise in stock market volatility could just be getting started. Although stocks saw what may be a relief rally to end last week’s trade, equities are once again under pressure on Monday as risk aversion is on the rise.

 

The rise in yields in and of itself may not be the biggest cause for concern, but rather the speed at which rates have climbed recently. The move higher in yields may not yet be over, either. Some have suggested that the benchmark ten-year note could hit a yield of four percent before the ascent fizzles out. Such a move is still a long ways from current yields around 3.26%. If yields continue to move higher, stocks could see more and more pressure as bonds and notes become significantly more competitive.

 

The rise in yields is by no means the only issue currently stirring the pot. Recent geopolitical developments between the U.S. and Saudi Arabia are also likely playing a role in increasing risk aversion. U.S. President Donald Trump has said that there would be “severe punishment” if it is determined that Saudi Arabia is responsible for the death of journalist Jamal Khashoggi. The Kingdom has stated that it would retaliate if action is taken by the U.S. and the country could look to leverage its oil production if necessary.

 

In fact, a recent article from marketwatch.com suggested that $400 per barrel oil should not be ruled out. If the Saudi Government decides to take retaliatory action, it could potentially rock global financial markets as a rapid and significant rise in oil prices could do significant damage to global economies.

 

Saudi Arabia is set to host the Future Investment Initiative, a large conference referred to as the “Davos in the desert” on October 23rd. Although U.S. Treasury Secretary Steven Mnuchin is still planning to attend, several other high-profile people have decided not to attend given recent developments.

 

The combination of higher rates, worries over trade and now the rift with Saudi Arabia may continue to weigh on investor sentiment and appetite for risk. Although stocks may find buyers if more downside is seen, the market could very well be in the midst of a shift from buy the dips to sell the rips. Concerns over these issues may keep stocks under pressure while fueling buying in perceived safe havens such as gold. The price of gold is now at a 10 week high, and the current geopolitical backdrop and rising risk aversion could keep prices on the move. An improving technical posture may also draw buyers into the market as recent price action could be indicative of a market bottom being reached.

There has been no shortage of news that could potentially have a significant impact on financial markets. Another rate hike from the Federal Reserve, the ongoing Supreme Court nominee saga and the global geopolitical landscape all have the potential to affect market action this week.

 

Last week, the U.S. Federal Reserve elected to hike interest rates again by an additional 25 basis points. The move from the central bank was not at all unsuspected and investors were likely far more concerned with the Fed’s outlook going forward. Although some changes were made to the central bank’s “dot-plot,” the Fed still sees another rate hike before the end of year and has penciled in another three rate hikes for next year.

 

The Fed’s commentary is always subject to interpretation, but some suggested that the past week’s comments did not reflect the type of hawkish tone that was anticipated. Of note were the central bank’s projections, which suggest economic growth will slow to sub-2% levels in the years ahead. This could be indicative of a fading away of recent stimulus measures including tax cuts and government spending.

 

In addition to the Fed, the ongoing state of U.S. politics could also start to weigh heavily on stocks and risk assets. The November midterm elections are quickly approaching, and the Trump administration is currently battling to get its Supreme Court nominee Brett Kavanaugh through the Senate and onto the highest court in the land. Numerous allegations of improper sexual behavior have forced the Senate to open another FBI background investigation into the nominee, and the week ahead is likely to be filled with increasing controversy and political discord.

 

Some have suggested that if the republicans are unable to confirm Kavanaugh to the Supreme Court, they will likely be looking at defeat in the midterm elections. If the democrats do take power, things could get very dicey as it would become extremely difficult for President Trump to continue to implement his agenda. Such a scenario could fuel a rapid spike in market volatility, and the stock market could take a very serious turn south.

 

In the meantime, the gold market seems to be content biding its time. The market has thus far shown little reaction to another hike from the Fed and the likelihood of another hike in the months ahead. Gold has continued to try to maintain price action at or near the $1200 per ounce level, and thus far the bears have been unable to force another significant leg lower.

 

The recent sideways action in gold could be the beginnings of the next great bull market. The longer the market trades sideways, the more explosive an eventual upside breakout could be. Such a move could be exacerbated by investors scrambling to put capital to work in alternative asset classes if or when stocks begin to really crack.

 

The long-term bullish fundamentals for gold, including weaker fiat currency values, geopolitical risks, recessions and overall risk aversion remain very much intact. Given these risks, it is likely only a matter of time before the yellow metal starts moving higher once again.