Written by Border Gold  June 27, 2017

The gold market is on its heels to begin the new trading week, with appetite for risk taking a bite out of the yellow metal’s appeal. Gold is once again finding itself on the defensive following another failed probe higher, and for now it appears that perhaps the market is quite comfortable in its recent trading range.

Weaker crude oil prices, higher stocks and a slight rebound in the dollar index are all likely weighing on gold currently, and the prospect of additional rate hikes from the Fed is not doing the market any favors either.

That being said, however, the Fed may take a more cautious tone in the coming weeks and months, and if no major legislation is passed in the U.S. regarding tax cuts and infrastructure spending investors may become considerably more anxious.

Although the Fed recently stuck with its plans of another rate hike this year, some recent weakness in key pieces of economic data and falling oil prices could give the central bank reason for pause.

The oil market has been a major story in recent headlines, as prices have slid to their lowest levels of the year in the low $40s per barrel. Crude oil is often considered a barometer of overall economic activity, and the energy sector-with its large market cap-has a tendency to lead the market whether the direction is up or down.

Lower oil prices may weigh heavily on energy shares and could potentially be a catalyst for a long-overdue market correction. Falling crude prices are also another primary example of the lack of inflationary pressures currently being seen. This represents yet another conundrum for the Fed, as inflation remains stubbornly below the central bank’s 2% target.

For the time being, investors will likely take a wait-and-see approach to the markets, and the path of least resistance in stocks still remains higher. Many analysts, however, are sounding alarm bells about current stock valuations, and the equities market could be getting closer to a major reversal.

The gold market may simply bide its time until a fresh catalyst for higher prices presents itself. The U.S. could see the next economic recession take hold in the coming quarters, and numerous geopolitical issues could also potentially fuel a risk-off mentality.

Stock investors have been relatively patient thus far, but will likely want to see some key pieces of legislation passed by the Trump administration in order for the bull market to continue.

If, or when, the stock market begins to show significant signs of weakness, gold could potentially see significant inflows that could fuel an upside breakout and send prices sharply higher from current levels. The Fed could find itself in a precarious position if stocks begin to falter, and the path of rate hikes could potentially be slowed even further-or even cease altogether.

In fact, you could certainly make the argument that the Fed may simply be raising rates in order to have the ability to lower them again if or when necessary. The notion of an ongoing period of lower rates may keep a floor under gold prices, and gold could see significant upside if the Fed is forced to change its current trajectory regarding monetary policy.