The gold market continues to consolidate around the $1200 level, and that may be a good thing. The market has remained under pressure for some time now, although recent price action could suggest that sellers have simply run out of ammo. At this point, the longer the market moves sideways the larger and more significant an eventual breakout may be and such a move would likely take place to the upside.

 

Investor appetite for risk is strong to start the week, with stocks moving higher in early Monday action. Markets have done a fantastic job of shrugging off many of the economic worries currently being seen, although just how much longer they will be able to do so is a critical question.

 

September is a historically tricky month for stocks, and this time around may prove to be no different. The equity markets are facing some significant headwinds, and with the U.S. mid-term elections rapidly approaching, things could get a lot dicier as volatility increases and as investors take some money off the table.

 

The Fed could play a major role in price action as well in the weeks ahead. It is widely expected that the central bank will hike its key interest rate again this month, and another move is still expected from the Fed before the end of the year. Although a December hike has come under increasing scrutiny, odds still look strong for the Fed to take further action. This has some analysts concerned, however, and some have even suggested that the central bank should keep rates at current levels.

 

Although higher rates could have an impact on stocks, possibly applying the brakes to higher prices, the bigger picture is a lot more concerning. Even with several more 25 basis point hikes, the Fed Funds rate would still be quite low. Given the low level of rates, the central bank may not have as many tools in the toolbox to effectively fight the next recession. It has been suggested that the next recession could be deeper and longer than the previous, and the Fed could essentially have its hands tied lacking the ability to lower rates enough to achieve the desired effect.

 

Such a scenario could potentially open the door to another round of QE, and some have even floated the idea of the Fed buying stocks or other premium assets. Whatever the case may be, the road ahead could certainly prove to be very bumpy, and complacent stock investors could bear the brunt of a rapid and significant decline in equity prices.

 

The dollar, which has without question played a key role in gold’s lack of upside, could also get hit hard. A major reversal in the currency could add fuel to the fire as investors seek out alternative asset classes and perceived safe havens.

 

It is impossible to say when-or if-such a scenario will unfold. There are numerous alarm bells already ringing loud, however, and it is up to investors to take heed. Given the current state of geopolitics and what are likely the late innings of the current economic expansion, the gold market could provide an excellent long-term value at current price levels and could see a protracted bull market get underway once the next recession takes hold.

It is difficult to address many of the current economic and geopolitical issues without also discussing the current state of politics in the U.S. Regardless of what side of the aisle you may lean towards, the risk of a major shakeup in U.S. politics is undeniable.

 

The past week brought with it a guilty verdict in the trial of former Trump campaign manager Paul Manafort, but also brought a plea deal by former Trump attorney Michael Cohen. There is widespread debate currently over the importance of these developments, however, it does seem that the President’s legal troubles are becoming increasingly serious.

 

The great unknown is whether recent developments and any future developments could have a real impact on the administration and how they may affect the nation going forward. The unfolding investigation has the potential to send an earthquake through global financial markets, and a constitutional crisis could plunge the country into recession as markets could potentially see massive declines on a scale not seen before. The President has alluded to this himself already, suggesting that an impeachment would cause stock markets to crash.

 

Stocks and other risk assets have thus far done an amazing job looking the other way. If the investigation uncovers more potentially damaging information, however, investors could begin to get significantly more anxious and possibly look to take risk off the table. Recent months have seen stocks and risk assets moving higher, while gold has been on the defensive and now trading at its lowest levels in some time. This could change in a hurry, however, and those buying gold around current levels could potentially be getting in on the ground floor of the next major bull market in the yellow metal.

 

In other news, the Jackson Hole, Wyoming symposium sponsored by the Kansas City Federal Reserve has come and gone. Of particular note based on commentary from central bankers is the notion of the Fed being in no hurry to hike rates much further. Although a September hike is still expected and will almost certainly take place, the Fed now seems a little more cautious and a fourth hike before the end of the year is now in considerable doubt. This could keep the economy humming a bit longer, but also poses the risk of inflation becoming a more serious threat.

 

The dollar index saw some pullback considering the central bank’s comments, and any further declines in the dollar could potentially help set the stage for a bottom in gold. The market may still need some type of fresh, bullish catalyst to bring the bulls out of hibernation, however.

 

Although attempting to call a bottom in a market is a tough way to make money, the argument can be made that gold at current levels could represent an excellent long-term value for the patient investor. Many of the issues that make the metal appealing, such as sovereign debt and weakening fiat currencies, are still very much in play. In fact, the U.S. could be running a massive deficit for short-term gain that may turn into long-term pain.

 

Looking at the bigger picture, now could end up being the ideal time to buy gold as prices are now around 40 percent off all-time highs while stocks could be at or near a long-term top.

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.

The bears have maintained a tight grip on the gold market, and prices continue to struggle to make any type of reversal to the upside. Higher stocks, a strong appetite for risk, a rising dollar and higher bond yields have all likely taken a toll on the yellow metal. That being said, the near-term does not seem to provide much reason to be bullish.

 

It is important to keep in mind, however, that when it comes to the financial markets things can and do change quickly. Increasing tensions over trade, more hawkish rhetoric out of North Korea or a stock market crash all have the potential to fuel a rapid and significant reversal in the gold market. Not only is a current lack of fresh, bullish inputs holding the metal down, but slow summer trading with declining volumes is likely not doing the market any favors either.

 

This week, investors will likely remain focused on the ongoing war over trade and central bank announcements. The U.S. Federal Reserve, the Bank of England and the Bank of Japan will all be meeting this week. Although the Bank of England is the only central bank expected to take any action this week, these meetings do have the potential to be market-moving.

 

Any commentary from the U.S. Fed may draw some extra scrutiny, as the bank has drawn some criticism from President Donald Trump. The idea of rising rates could quickly put a dent into recent economic strength. On Friday, the U.S. posted a robust GDP reading of 4.1%, and leaders seem to feel confident that the economy can strengthen even further. Higher rates could make that much more challenging, however, and recent comments from Trump and others could potentially be seen as a test of the central bank’s independence. Markets still expect the central bank to hike rates twice more this year, with the next move taking place in September.

 

The other major report set for release this week will be Friday’s non-farm payrolls report. A strong jobs report will bolster the case for further rate hikes, while a significant miss has the potential-albeit small-to give the Fed reason to think twice.

 

For now, the gold market remains in a strong downtrend and prices are likely to stay under pressure in the absence of any fresh, bullish catalysts. Traders and investors may now be confident taking a wait-and-see approach to the market, as further declines could provide a better long-term buying opportunity. Some analysts have suggested that the market could potentially find a lot more buying interest in the $1180 area, which the market has not seen since late 2016/early 2017.

 

U.S. Treasury Secretary Steve Mnuchin has suggested that he thinks the economy could remain strong for several years to come, growing at or above 3%. Of course, numerous issues could potentially put a major dent in growth, and it remains to be seen how a fading of both recent tax cuts and government spending might affect the economy.

The tough times for gold have continued as prices seem to be languishing around a 12-month low. The bulls have not had a great deal to cheer about in recent months, and prices may yet see fresh lows before the selling pressure subsides.

 

The good news, on the other hand, is that several of the primary factors that may be currently weighing on gold are likely to abate in the months ahead. A stronger dollar, the potential for a trade war, rising interest rates and strong stocks have all taken a toll on the yellow metal. Market conditions can and do change-sometimes rapidly-and several of these major issues may no longer act as an obstacle to higher gold prices in the near future.

 

Although the dollar could potentially see some additional upside in the weeks and even months ahead, the greenback is likely approaching what could be a major long-term top. The currency has risen as the U.S. Fed has taken further steps to normalize monetary policy, while some other key central banks, such as the ECB, have maintained ultra-low rate policies. That is likely about to change, however, as the ECB is widely expected to begin taking steps of its own to normalize rates in the months ahead. If the ECB and other central banks join the U.S. in a more hawkish stance, the dollar could lose significant steam as other currencies look to play “catch-up.”

 

Also potentially affecting the dollar could be a top in yields of the benchmark ten-year Treasury note. Yields have been on the rise, but have given back some recent gains after moving above the key three percent level. Yields may make another run at recent highs, but are not likely to climb much, if at all, beyond those levels.

 

The ongoing issue of trade is an important one, and has likely also played a role in the dollar’s recent strength. Despite the recent tit-for-tat standoff with tariffs, it is difficult to imagine a full-blown global trade war taking place for any extended period of time. The gold market could be in a unique position to benefit either way. If trade tensions calm, it may also take some wind out of the dollar’s sails, possibly boosting gold in the process. If the trade war does escalate further, gold could potentially see some significant flight-to-safety buying that has thus far been lacking.

 

In other news, China’s latest reading on second quarter GDP came in at 6.7%, basically in line with expectations although slightly lower than the Q1 reading of 6.8%. Concerns over the health of the world’s second largest economy have also likely played a big role in gold’s lack of upside, as numerous other areas within the commodity sector have floundered as of late. Positive news out of China may help give the gold market a lift, as the metal has shown a recent tendency to move lower with raw commodities. Gold’s status as a safe haven asset has been questionable recently, as investors have not shown much interest in the metal despite increasing tensions over trade and many questions surrounding North Korea’s willingness to denuclearize. That status can change quickly, however, and any one of several factors could potentially fuel a significant rally in the gold market.