Written by Border Gold     October 02, 2017

The gold market has been on the defensive in recent weeks, and the selling could potentially continue in the absence of any fresh, bullish catalyst. Whether or not the declines seen in recent sessions are just more back and fill trade following the recent rally or if it could be the early stages of a more significant sell-off remains unclear.

On the geopolitical front, the ongoing with conflict with North Korea has seen more back and forth tough talk and rhetoric from both sides, but thus far no new action has been taken. Over the weekend, U.S. President Trump suggested that his Secretary of State, Rex Tillerson, was wasting time trying to negotiate with North Korea. Trump seems to be of the opinion that diplomacy has already failed, and that more concrete action will be necessary to put a halt to the country’s nuclear program. Exactly what more action might look like remains unclear, but the U.S. has repeatedly stated that a military option does exist.

Stocks continue to make fresh all-time highs, and with no major news concerning North Korea, investors appear comfortable in risk assets. The current state of investor risk appetite could change-and change quickly-if North Korea again defies the international community and engages in another provocative act of aggression. A hydrogen bomb test over the ocean, as the North has suggested, could potentially fuel a significant flight to safety while sending markets into a tailspin.

Gold’s recent declines may also be partly attributed to recent commentary from the U.S. Fed. In its latest meeting on monetary policy, the Fed has suggested that it remains on track for another rate hike before the end of the year, followed by another three hikes next year. It is important, however, to keep any such action from the central bank in context. Even with another four quarter point rate increases, rates will stay be at very low levels. Some analysts have even suggested that rates are not likely to return to previous levels seen as the Fed attempts to normalize policy.

The Fed has acknowledged the ongoing lack of inflationary pressures, but so far does not see this as a barrier to higher rates. If inflation does not gain traction, however, the central bank may decide to rethink the trajectory of monetary policy. Simply put, rates could remain subdued for a long time yet, and the notion of higher rates will likely not become a major obstacle for higher gold prices.

The gold market will likely take its cues from geopolitics and the stock market over the next several weeks. Higher stocks and the possibility of meaningful tax reform in the U.S. could keep a lid on higher gold. On the other hand, any signs of a stock market reversal or any further escalation in U.S./North Korean tensions could pave the way for higher gold.

The U.S. Dollar index may also be a major factor for gold in the coming weeks. After seeing significant selling pressure over the last few months, the greenback is clawing its way back. A stronger dollar may also limit gold’s upside in the near-term, while a return to recent lows or beyond in the dollar could fuel a sharp rally back to recent highs in gold or far beyond.