With a shortened trading week due to a holiday, domestic equity markets closed in the red last week as more news came into the spotlight regarding renewed military action in the Middle East. This marks the second consecutive weekly loss for stocks.

On Thursday afternoon, the US announced it had deployed the largest nonnuclear bomb in history on an ISIS tunnel complex in Afghanistan. Equity markets did not react well to the news, to say the least.

The financial sector took a particularly severe hit, declining 2.6% for the week. Despite the fact that two of the largest banks in the country, JP Morgan Chase and Citigroup, both beat analysts’ expectations for revenue and adjusted earnings per share last week, both companies saw dramatic declines in their stock prices after news of the military strike in Afghanistan.

When asked if the bomb serves a message to North Korea, President Trump said, “I don’t know if this sends a message. It doesn’t make any difference if it does or not. North Korea is a problem. The problem will be taken care of.” Judging by the market reaction, investors did not interpret this as a particularly calming and reassuring statement. As such, the typical “fear asset,” gold, rapidly transformed into the biggest buying frenzy of the week.

Gold soared to its highest level of 2017 and posted its best weekly gain in almost a year. Precious metals are once again the best performing asset class of 2017, with silver and palladium topping the charts with 15.38% and 16.37% gains, respectively. Gold’s 11.36% YTD gain is finally enough to outshine the Nasdaq 100’s YTD gain of 10.22% for the first time, thereby making gold one of the top performing assets this year.

“We’re in a wait-and-see mode at the moment,” said Kate Warne, a principal and investment strategist at Edward Jones. This certainly seems to be the case as investors are facing unprecedented military and policy events left, right, and center.  Moreover, going into the close, gold and volatility (as an asset class) hardly declined at all. In fact, gold rallied into the close and finished only $0.60 away from the YTD high it made early Thursday morning.

For now, it seems “the fundamentals have and will continue to drive the market,” Ms. Warne went on to say. She noted how a group of upbeat earnings reports could lift equities in the coming weeks.

However, if JPM and Citigroup are any indication of what’s to come for stocks, the outlook may not be as optimistic as the strategists ad Edward Jones would like it to be. Meaning, two of the biggest banks in the US posted incredibly positive and solid earnings, but both stocks significantly declined on news of the direct military action in Afghanistan. What does this tell investors?

Well, it has left many investors scratching their heads, because earnings can’t be any more upbeat for blue-chip companies than they were for JPM and Citigroup. Therefore, if declining markets are the reaction to upbeat earnings reports, what will the market reaction will be if a collection of earnings reports are not upbeat? This is the scary reality facing investors today.

This possibility, combined with the potential for more news of US military strikes and stone-cold tensions with North Korea could easily worsen the existing equity market sell-off and instigate a completely uncontrolled tailspin that simultaneously sends precious metals into even more of a buying frenzy.

It’s difficult to forecast the movement of gold because of so many factors influence prices. However, can the multitude of data points, in fact, be an advantage to analysts? The answer might be yes.

Triangulation is the process of determining an unknown location by using two known points. Surveyors often use this method to orient themselves. From two points, they identify their position by creating a triangle. This technique of using relative measurements offers interesting implications for gold investors. Amid the spectrum of data, are there two key points that can help forecast the future of gold? Perhaps two pieces of information about today and tomorrow can help place gold’s future.

Today: Geopolitical Uncertainty   

Markets and the world continue to wait and wonder about the fate of global politics. Brexit awoke many to the fact that the unexpected can happen. Reinforcing this lesson was the election of Trump. Polls and media outlets initially dismissed the candidate. Today, many are questioning if expectations of globalism are misplaced.

In France, populist candidate Marine Le Pen is tied with independent candidate Emmanuel Macron to win the first-round vote on April 23rd. Le Pen’s well-publicized ambitions to pull out of the eurozone echo Britain’s latest move. Meanwhile, U.S. strikes against Syria have left many on both sides unclear on Trump’s international stance.

How has this uncertainty influenced gold? “Gold prices shot to their highest level in five months,” reported The Wall Street Journal just days ago. While that movement is short-term, there is reason to believe the trend could continue. Elections and international policy continue to steer us away from globalism. As a result, renewed interest in gold and its identity as a hedge may boost prices.

As senior asset strategist with NN Investment Partners remarked: “Over longer periods, correlation between broad commodity prices and policy uncertainty is low to slightly negative.” However, he pointed out that “exceptions include precious metals with a more pronounced positive correlation.”

Tomorrow: Mining Industry

The nationalistic stance of our leaders today is mirrored in the mining industry of tomorrow. “Many governments have not softened their stances around resource nationalism,” remarked authors of an industry report from Deloitte. This isolation slows supply growth because countries are unwilling to grant permits for mining operations. The Deloitte report laments the burden of taxes, fees, and royalties on miners. Increasingly, miners are learning that gold is more expensive to source.

Compounding these balance sheet problems are labor issues. Countries rich with potential for miners are hesitant to engage in a relationship. The reason: countries see mining firms as exploitative of the workforce. “It doesn’t help that mining company taxes do not translate into direct infrastructure investments, making it difficult for many stakeholders to understand the real contribution miners are making in their communities,” explains the same report.

Some have suggested that miners should return more wealth to the countries in which they’re operating. Others urge miners to engage host countries in a dialogue about long-term benefits to GDP resulting from resource extraction. While some of these ideas may work, they will require time to implement. Additionally, more time will be needed to see the results of these new efforts. In the meantime, demand will outstrip supply and prices are likely to rise.

Both recent geopolitical uncertainty and long-term mining woes underpin a bullish outlook on gold as an investment for the future. These two separate points help locate where gold may go in the years or even decades to come.

Gold prices skyrocketed to a five-month higher on Friday in a traditional flight-to-safety move after President Trump ordered a  U.S. missile strike on a Syrian air base in retaliation for a chemical weapons attack on Syrian citizens.

Market Reaction

• Gold: The gold market tacked on additional gains on Friday after the Labor department reported a mere 98,000 new jobs were created in March, dramatically lower than the 175,000 new jobs expected by economists.

Safe-haven buying and ideas that the weak jobs report could delay or slow future Fed interest rate hikes propelled spot gold to an intraday high at $1,272.10 an ounce, a five month high.

• Stocks: The broad stock market swung slightly higher and fell to a modestly lower close Friday. Defense stocks were big winners as shares of Raytheon, Lockheed Martin, and Northrop Grumman closed out with strong gains.

• Crude Oil: The potential for additional escalation in Syria also sent crude oil prices sharply higher on Friday, which is also supportive to the gold market from an inflationary perspective. Crude oil spiked higher amid concerns that President Trump could be now taking a more interventionist approach to the region and if conflict were to spread to Iraq it could disrupt crude oil production.

Rising Risks on the Horizon

Rising geopolitical uncertainty and concerns about cracks in the economic picture have created fresh investor appetite for gold. Increasing tensions with North Korea and upcoming French elections are boosted demand for gold as a safe-haven investment.

Potential Conflict with Russia

The U.S. missile strike against Syria puts the U.S. relationship with Russia at risk. On Friday, Russian President Vladimir Putin called the missile strike President Trump ordered against Syria “an act of aggression against a sovereign state delivered in violation of international law under a far-fetched pretext.” Also Russia initiated an emergency meeting of the United Nations Security Council to discuss the incident.  On Friday afternoon it was reported that Russian warships were steaming toward the U.S. Navy warships that launched the Syrian attack.

Meeting with Chinese Leader

Also on the radar, on Monday financial markets will be digesting any fall-out from the weekend meeting between Chinese President Xi Jinping and President Trump, which concludes on Saturday.

 Good Buying Levels Are Seen Now

Gold slipped off its highs on Friday, pressured in part by strength in the U.S. dollar. Current levels continue to offer investors a relative bargain compared to prices recorded in 2016.

Last July, gold prices traded as high as the $1,390 an ounce level.  Precious metals traders are monitoring the $1,265 an ounce level closely and sustained strength above that zone could be the green light for another strong rally wave in the yellow metal with the $1,300 level as the next bullish chart objective.

Middle East and Russian tensions are rising. Missiles are flying and the economic picture may not be as strong as Fed officials believed earlier.

How much of your portfolio is invested in stocks? Financial advisors warn that holding too much of your assets in stocks could leave you exposed to more risk and volatility than you may be comfortable with.

Take the time to assess your risk tolerance level. Research has shown that diversifying a portfolio with up to 20% of precious metals exposure can reduce volatility and produce better longer-term returns. Plus, you may be able to sleep better at night knowing that your portfolio is properly diversified.

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A tax on capital gains from the sale of gold is a tax on inflation. That sentiment is the underpinning of Republican Ron Paul’s arguments for a gold tax exemption in Arizona. The 2014 bill comes from Rep. Mark Finchem.

Paul urged the state Senate in Arizona to tax citizens “more honestly” while arguing that it’s unfair to punish people for attempting to safeguard against inflation.

The argument is timely. In February consumer inflation exceeded the Federal Reserve’s targeted annual gain of 2%. The trend marks a welcome departure from the unemployment and excess capacity that slowed the economy in previous years. Fed Chairwoman Janet Yellen was clear in her March press conference. “We expect core inflation to move up,” she remarked.

The importance of this 2% milestone is significant. The U.S. still experiences reverberations from the global financial crisis nearly a decade later. Inflation has been below 2% since May of 2012. Many gold purchasers keep a close eye on such figures. Gold has become more attractive for investors in our low-rate environment. It’s easier for investors to ignore interest-bearing instruments for gold when yields are depressed. Moreover, recent equity market volatility amid a tumultuous new administration will likely invigorate interest in gold. There is no perfect inverse relationship between stocks and gold. However, the commodity is useful as a diversification strategy. “You need to have the insurance when the fire happens,” remarked the CEO of one gold ETF firm.

Paul, however, met with resistance while testifying before the Senate Finance Committee. Democratic Senator Steve Farley from Tucson dismissed statements from Paul calling the measure merely a “tax giveaway to coin collectors.”

The pivot point in the debate centers on face value. While Paul argued that it’s illogical to tax money, Farley countered that a coin with a $20 face value is worth far more today. Speculators who are choosing gold as an investment, he claims, should be taxed just like those owning stocks and bonds. Paul maintained that stocks and bonds are different because they aren’t money. It appears the argument did not convince Farley.

The debate illustrates two different perspectives. Farley contends that over the decades gold has risen in value. Paul, however, remains firm that the inherent value of a gold coin is unchanged. Paul believes that the price appreciation of a coin is merely a relative measure; the coin hasn’t increased in value. Instead, paper money has dropped he argues.

Beneath the philosophical musings of Paul and Farley are likely more pragmatic impulses. Perhaps Paul and his constituents have personal financial stakes in the outcome of a lesser tax burden. Meanwhile, Farley, if ultimately unsuccessful may see a significant drop in state tax receipts.

The bill passed the House and eventually received a 4-3 vote approval in the Senate Finance Committee. The next hurdle will be the full Senate where some remain opposed. Similar measures have seen success in other states. In March of this year, the Idaho House of Representatives voted to end all state taxation on gold and silver by a 56-13 margin.  

The first fiscal quarter of 2017 officially ended on Friday of last week as US equities posted another solid weekly and monthly gain. Despite the longer-term trend of decent gains, equities around the world were mostly mixed during trading on Friday.

For equities in Asia, Hong Kong’s Hang Seng Index was down 0.78%, while Japan’s benchmark Nikkei 225 was down 0.81% for the day. Trading was not much better in Europe either, as London’s FTSE 100 closed down 0.63% for the day.

Analysts are attributing the lackluster final day of Q1 trading to the incredibly persistent political and economic uncertainty that started late last year and has ceased to abate. This is especially the case for equities in Europe, as British Prime Minister Theresa May signed and invoked Article 50 and officially started Brexit.

From when the article was invoked on Wednesday of last week, there are now less than two years and counting before the UK physically withdraws from the EU. In spite of the 24-month time-frame before any changes are felt, the signing of Article 50 seemed to unnerve some investors.

In terms of commodities, crude oil is back above $50 per barrel and ended with a sizable weekly gain of over 5.50%. Gold and silver are slightly negative for the month, but both metals posted an impressive gain of over 8% and 13%, respectively, for the first quarter.

Coming off a failed health-care reform attempt last week and a subsequent market sell-off of equities and other risk assets, investors looked towards economic data this week to gauge the direction of the economy.

Because of this, overall investor worry (measured by the VIX index) declined last week after a multitude of outstanding economic data was released. In fact, equities rallied nicely on Tuesday after consumer confidence exploded to the highest level since 2001. Domestic equities continued their gradual upward drift throughout the week.

As the second quarter is now here, so is a new earnings season. Judging by the surprisingly upbeat economic data released in the past few weeks, it’s safe to say market participants will not be overly shocked to see companies releasing solid earnings. If earnings reports are strong, markets will, as a result, edge higher. Earnings reports are only released four times per year, and they are one of the major drivers of overall market direction.

But many investors are not so sure Q2 will be full of rainbows and sunshine. With political uneasiness that just refuses to go away, apprehensions about the market are commonplace. Moreover, margin debt, or the amount of money retail and institutional investors borrow against their brokerage accounts for additional buying power, hit an all-time high in February.

This means market participants are using a lot of leverage with the expectation that prices will rise. If, however, prices fall dramatically, things could turn sour very quick due to the unprecedented level of leverage.

All-time market highs, all-time margin debt, and shocking political upsets (Brexit and the US election) all occurred during Q1, defying almost everyone’s expectations. So what does Q2 hold for the markets? The simple answer is: it’s anyone’s guess.