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The gold market saw a bounce on Friday to finish out the trading week. The market is now sitting right on long-term support at the $1675 level. A battle may be seen early next week over this area as the bulls look to keep the three-year uptrend intact. If the bars are able to take the market lower, the uptrend will be negated and bearish sentiment may be increased even more.

The gold market sitting at this current level may present the bulls with a great opportunity. The market has been all doom and gloom for weeks now, and especially since it broke the $1700 level in the last week. Despite that, however, the bulls could show immense underlying strength if able to hold and defend long-term support at $1675. Bull markets are often built on basing action at key levels, and this case would be no different.

If the bulls are unable to hold $1675, however, the bears may open the floodgates to a move sharply lower. There may be little, if anything, standing in the way of gold going rapidly to the $1550 area before finding some more solid footing. Of course, mcu of what the market does or does not do will be largely dictated by the Fed and  its plans for monetary policy. The Fed is widely expected to raise rates another 75 points next week, and a chance of a full 100 point hike has now also been priced in.

Regardless of what the Fed does next week, the markets may be far more interested in its plans for the months ahead. The Fed is likely to keep hiking rates until the end of the year, but what it does early next year remains anyone’s guess. Some have suggested the Fed will eventually feel the need to take a pause or reverse course on start easing. Whether the Fed does in fact do that likely depends on how markets react to ongoing tightening and if the U.S. enters recession. Worries over a recession have been on the rise in recent weeks. Troubling data out of China is also adding fuel to the fire. The globe’s second-largest economy is also slowing down significantly. The Chinese Central Bank, however, is taking the opposite approach of the American Fed. China has and will likely continue to ease financial conditions to give its economy a boost.

A global recession would be a bad thing not only for stocks and risk assets, but also for gold potentially. Demand for the yellow metal could sink substantially along with demand for other commodities if Chinese troubles remain or increase. While gold may be an excellent long-term investment, short-sighted investors may elect to shy away from it if demand slows. This could leave many investors turning to perhaps the worst asset class possible: holding cash in dollars.

The dollar has been on a run in recent months. As long as the Fed keeps up its hawkish rhetoric and continues to raise rates aggressively, the dollar may keep running higher. Once the Fed decides to stop hiking or even starts to take rates down again, look out below. The dollar could collapse quickly, leaving many investors in the wind.