The gold market is taking a bit of a breather in early action to start the new trading week. Prices did, however, reach a 5-month high in overnight action before pulling back. The market is attempting to break through key resistance at the October highs around $1252 and looks poised for further upside on a successful breach.
Safe-haven demand for gold has increased substantially in recent weeks, and given the current economic and geopolitical backdrop investors may continue to seek out alternative asset classes. Rising stock market volatility and further declines in risk assets could keep a very strong bid in the gold market, and an increasingly dovish Fed will also likely add fuel to the fire.
The ongoing war on trade with China remains a focal point of concern for investors. Although President Trump suggested after his meeting with Chinese President Xi Jinping that a deal may be close, skepticism has grown and the recent arrest of a Chinese executive by Canadian authorities and her possible extradition to the U.S. is not helping matters. China is growing increasingly angry, and the matter has the potential to put any talks on trade in serious jeopardy.
Recent developments in the ongoing investigation into possible Russian Collusion in the U.S. may also have investors on edge. New documents released last week seem to suggest that the special counsel is approaching a conclusion, and there is increasing talk of impeachment. With the democrats set to take control of the House in January, the investigations into this issue could potentially expand further and the Trump administration could have an increasingly difficult time implementing its agenda. Headline risk is significant and the potential for a major shakeup in Washington may also keep investor appetite for risk limited.
The ongoing Brexit saga is also weighing on sentiment as U.K. Prime Minister Theresa May recently cancelled the vote on her Brexit deal. Apparently, May felt that she would not be able to get the deal passed through the House of Commons at this time and the vote may be rescheduled for next week or even put off until early January. News of the delay sent the pound tumbling to 18-month lows. With major issues such as open borders and free trade arrangements hanging in the balance, any further breakdown in negotiations has the potential to send major waves through global financial markets.
In the meantime, growing concerns over a global economic slowdown will also weigh heavily on markets and risk appetite. Recent data out of China showed shrinking imports and exports, with exports rising by only 5.4% while consensus estimates were looking for a gain of 10%. To say that Chinese trade data is sluggish would be an understatement and the trend towards slower growth and demand could keep global markets on edge. Recent data may also suggest that the nation may take additional steps to try to halt the recent economic slide.
All of the issues outlined above could fuel significant risk aversion and even panic selling in global markets. As stocks continue to work their way lower, a protracted bear market may become increasingly likely. Further declines in risk assets will likely propel gold and other perceived safe-haven assets higher as a major asset rotation gains steam.