The gold market lost ground in light trade Monday as markets were closed in observation of the Martin Luther King Holiday. Driving price action across markets was the latest economic news out of China.


On Monday, China reported the slowest pace of economic growth since 1990. The world’s second-largest economy reported a growth rate of 6.6% for 2018. The fourth quarter was especially trying for the country as growth slowed to a pace of 6.4% from Q4 last year.


The ongoing U.S./China trade war is certainly having a clear effect on China’s economy. Chinese exporters were forced to lay off employees and the damage control doesn’t end there. Companies also reported slashing capital expenditures, cutting prices and even cutting wages. The squeeze on corporate profits and employment could potentially cause the slowdown to deepen further and some analysts are of the opinion that economic conditions may be far worse than the data suggests.


Further evidence of a drastic slowdown in China could impact markets this week and beyond. Stock and commodity prices could both come under pressure as Chinese demand weakens further and as risk appetite fades.


Outside of China, the U.S. is dealing with plenty of issues of its own that could drive market volatility. The U.S. economy has also shown signs of slowing, and the manufacturing sector has become a particular source of concern. A downtrend has been established in manufacturing across various regions as the effects of the trade war become increasingly apparent. To make matters worse, the Federal Reserve has thus far stuck to its planned rate hikes and balance sheet contraction.


The Fed has recently begun to sing a different tune, however, as the slowdown gathers steam. Although the Fed still has two more rate hikes penciled in for 2019, traders are betting that no hikes will take place. In fact, some are even wagering that the central bank could be forced to cut rates before the end of the year.


Recognizing the recent string of weakness, the Fed will follow the data before making any further decisions. If the Fed elects to keep rates at current levels, or to begin cutting again, the effects on the dollar could be substantial. Dollar strength in recent months has been a primary obstacle to higher gold prices and any significant weakness in the greenback could pave the way for the next major leg up in gold.


As a major consumer of gold, Chinese weakness has the potential to weigh on the metal. That weight may be counterbalanced, however, by a weaker dollar and rising risk aversion. The gold market may also begin to see fresh inflows if equity markets resume their recent downtrend. Although stocks have posted some solid gains in recent sessions, the market is now at a large resistance area that could potentially act as a key turning point.


After making one significant attempt to crack key upside resistance, the gold market has pulled back. Although buyers have been quick to jump in and buy dips in recent weeks, the metal’s failure to make a fresh high may make the market increasingly vulnerable to a larger sell-off.