The gold market is seeing some follow-through buying to kick off the new trading week as the dollar rally shows more signs of fading. The dollar has declined to about a three-week low, and gold is likely benefiting not only from dollar weakness but also from bargain hunters and short-covering.

 

Stocks have begun the week on a strong note, with the Dow Jones Industrial Average up over 200 points in early trade. Despite the numerous economic and geopolitical issues currently being faced, investors remain hungry for risk and will likely keep buying stocks in the near-term until proven wrong.

 

The U.S./China trade war officially got underway Friday as new tariffs took effect. Although markets do not appear to be very concerned at this point, some investors are clearly taking note and expressing concern over the potential effects of a war on trade. On Friday, Bridgewater Associates founder Ray Dalio tweeted: “Today is the first day of the war with China.”

 

Dalio is no ordinary investor. His hedge fund is the largest in the world, managing some $160 billion. His tweet would seem to suggest that investors are not appreciating the possible global impact of a trade war. As both sides threaten further tariffs on trade, the situation could become far more serious in a hurry, and market volatility could come roaring back with a vengeance.

 

Also on the geopolitical front is the somewhat bizarre situation with North Korea. The ongoing negotiations between the U.S. and the country over denuclearization have taken a negative, hostile and arguably predictable turn for the worse. Fresh comments from North Korea seem to suggest that the two countries are not on the same page at all. This comes just a few weeks after leaders from both nations seemed to find some common ground and appeared willing to open a new chapter in relations.

 

The flattening yield curve may also be an area of focus for investors this week and in the weeks ahead. The curve has now declined to a level under .3%. If the two-year yield moves above the 10-year yield, it would be a strong indication that the next recession is on the horizon and could fuel a significant flight to safety in the marketplace. An inverted yield curve could force the Fed to rethink its plans regarding interest rates, and the central bank could even have to consider cutting rates again to fight the next slowdown.

 

In the meantime, the gold market could remain on the defensive as a deteriorating technical posture and bearish sentiment take a toll. Given the potential for a serious escalation in the war on trade as well as the increasing risk of recession, however, prices may not fall significantly further from recent levels. If, or perhaps when, the stock market does reverse course, the gold market could see a dramatic increase in investor interest and could embark on what may very well be the next major cyclical bull market.