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The gold market has been showing some signs of underlying strength in recent trade, as the metal has recouped nearly $50 per ounce recently. Although gold still remains within its multi-month trading range, the yellow metal could potentially be headed for an upside breakout.

Gold has had a number of bearish factors working against it in recent months. These factors include a previously more hawkish-sounding Fed, all-time highs in equity markets and a stronger dollar. Despite these issues, however, the yellow metal did not suffer any major breakdowns in price.

You could make the argument that the tide has turned in recent weeks. The Fed appears to have taken a very different tone in recent commentary. Although some policy hawks remain, the central bank seems to be taking a more cautious approach regarding monetary policy. In fact, the central bank will likely not raise rates again until December, if they do at all again this year.

Although the central bank is fulfilling its mandate regarding full employment, inflation remains well under the Fed’s desired target of 2% on an annualized basis.

The dollar seems to be telling a similar story. The greenback strengthened in the aftermath of the Trump Presidential victory on the idea of fiscal spending, higher economic growth and tax cuts. The administration, however, has yet to pass any major legislation regarding infrastructure or tax reforms. Currency markets have been paying attention, and the dollar could be on the verge of a significant leg lower in price.

Further weakness in the dollar could keep gold well-supported, and as long as the dollar remains on the defensive gold is not likely to see any major moves lower.

This would seemingly leave equity markets as the primary hurdle standing in the way of a major upside breakout in gold. Stocks have not strayed far from all-time highs, but you could certainly argue that the aging bull is getting quite long in the tooth. Some analysts have even suggested that a major top in stocks could be seen in the coming weeks.

If or when stocks do reverse course, the fallout could be significant. Although estimates vary, the market could potentially see a drop of over 20 percent, and some have even suggested that a drop of 40 or 50 percent could be seen. If or when the trend does turn lower, much of the capital currently invested in stocks could begin to look for alternatives. Gold could very well be at the top of the list and could see massive inflows if stocks see a swift and severe correction or enter into what could be a protracted bear market. 

In the meantime, safe haven buying may also keep gold moving higher. The Trump administration appears to be in serious turmoil. On Friday, Press Secretary Sean Spicer resigned as Trump hired Anthony Scaramucci as his communications director. The shakeup in the Trump White House could be just getting under way. The President has been under increasing scrutiny as the ongoing investigation into alleged collusion with Russia by the Trump campaign to sway the election is taking a toll.

The path of least resistance in gold has turned decidedly higher, and a breakout of recent highs could possibly set the stage for a major leg higher in price.