The trading week may got off to a somewhat rocky start, as the Columbus Day Holiday in the U.S. and Thanksgiving in Canada could lead to lower trading volumes and higher price volatility. The gold market is not kicking off the new trading week on the right foot, and has once again sunk below the psychologically important $1200 level.

 

The question many investors may be contemplating right now is whether or not increasing risk aversion will be enough to propel gold higher. Although the metal saw some strength on safe haven buying last week, it has yet to put together a significant and sustained rally. The weakness being seen in gold today may even encourage the bears to come out once again for another attempt at fresh lows.

 

The story that has dominated financial headlines in recent days has been the sharp increase in bond yields. Bonds and notes have seen a strong sell-off that has fueled a strong increase in rates, and there could be further room to run for the bond bears. The quick ascent of rates has investors taking notice, and stocks saw some significant selling last week as higher rates fuel concerns over earnings and other factors. Stocks are picking up where they left off to start the new trading week, and weakness in Chinese markets is exacerbating the situation further.

 

Despite gold moving lower today, the market likely remains at or a near a bottom. It is important for investors to keep in mind that a market bottom is a process rather than simply a low print. The gold market has been able to absorb the selling pressure around current levels, and thus far the bears have failed at carving out a fresh low. The longer the market stays within its recent trading range, the more potent an eventual upside breakout may be.

 

Numerous bullish factors remain in place to encourage buying in the yellow metal. Of particular note is the recent pickup in central bank purchases. Although central banks may see enormous value in gold at current levels, lower prices are likely not the primary reason that these massive financial institutions have increased their purchases. Numerous factors including a U.S./China trade war and Brexit may be major considerations for stepping up purchases in an effort to diversify away from the dollar.

 

Speaking of the dollar, the U.S. currency may continue to play a major role in the gold market. The greenback has been strong, and its ascent has likely been a major obstacle to higher gold prices. The dollar may be at or near a top, however, as the Fed may avoid hiking rates much further in an effort to keep the economy going. The central bank has another hike penciled in before the end of the year, and currently has another three hikes scheduled for next year.

The current economic expansion and bull market in stocks are arguably getting long in the tooth, and the risk of recession appears to be on the rise. Against this backdrop, you have to wonder just how far central banks will be willing to go in order to normalize monetary policies, and must also consider how central banks may react once the economy begins to contract.

 

Whether it is next month, next year or in the quarters ahead, rates could very well be on the decline again, taking the dollar lower with them.