Markets are likely to pick up this week where they left off last, and light holiday trading volumes could potentially exaggerate buying or selling pressure. U.S. markets will be closed on Tuesday in observance of the Fourth of July Holiday, and many traders and investors may be vacationing this week.
The gold market has been seeing some steady selling pressure in recent trade, and that pressure looks set to continue this week. As long as stocks remain on the offensive, the yellow metal may have a difficult time making any significant upside headway.
Although the path of least resistance remains higher in equities, the stock market has been showing some signs of weakness. This is significant, as a reversal in stocks could potentially be the next major bullish catalyst for gold.
Ongoing weakness in crude oil is likely to take a toll on stocks, as the energy sector is often the leader. A move back down to the $40 per barrel level or beyond could have a significant impact on global equities, while also having the potential to move currency markets.
Speaking of currency markets, the dollar index has also been in a downward spiral and remains in a firm downtrend. Further weakness in the greenback could also be bullish for gold and other dollar-denominated asset classes. If recent dollar declines can be attributed to a lack of policy progress by the Trump administration, the currency could continue to see pressure as any passage of key pieces of legislation such as health care and fiscal spending could be further down the road than originally anticipated.
Outside of the geopolitical sphere, investors will remain focused on the economy and the Fed. Although the central bank recently raised interest rates again, more and more analysts appear to be questioning the Fed’s plans going forward. The central bank stuck to its guns regarding plans for another rate hike this year, although there are numerous potential issues that could cause the Fed to stand pat.
With the odds of a stock market reversal seemingly increasing by the day, and the possibility of the next recession also on the rise, the Fed may remain very accommodative for the foreseeable future. Not only may the Fed remain supportive, but the notion of the central bank taking rates back down to zero is certainly plausible if markets take a major turn for the worse.
The gold market has some issues working it against it currently, but it also has numerous issues that could fuel inflows into it. Recent range-bound price action in gold could be indicative of a market that is readying for a major breakout, and the longer the market goes sideways the more significant any breakout could be.
Given a relatively weak economic backdrop, a dovish Fed and the many geopolitical issues currently being seen around the globe, our money would be on an upside breakout in the months and quarters ahead. In fact, gold could be getting ready to embark on a multi-year bull run as stocks may be approaching the beginning of a protracted bear market.