Gold prices continue to do what I’ve been expecting, as gold trades just north of $1,200.
But there’s a case to be made that the gold price will only move higher…
For anyone wondering what may have triggered the big gold price sell-off since April, the answer may be a combination of U.S. dollar strength and emerging market weakness.
Should the dollar resume its overall downward trend, much of that could reverse and in turn provide support for gold.
Today, I’m going to show you that’s exactly what’s been happening for the price of gold over the last week.
Plus, I’ll show you how gold’s latest rally is fueling my newest gold price prediction…
How Gold Prices Reacted to the Dollar
The U.S. Dollar Index (DXY) was in a clear downward trend for the past week. The DXY started out very early on Monday (Sept. 17) slightly below 95, but sold off that morning to 94.5.
It would trade around that very level for the next two days.
That allowed gold prices to rise on Monday from about $1,194 to a morning peak at $1,204. But profit taking kicked in, and the metal dropped back to $1,201 by the 5 p.m. close.
As the dollar moved sideways on Tuesday (Sept. 18) and Wednesday (Sept. 19), so did gold. The gold price bounced from $1,197 to $1,204 over the midweek.
But Thursday (Sept. 20) brought another 50–basis point drop in the DXY to about 93.90, and that powered the price of gold to a $1,207 close.
Take a look at the DXY’s steady decline over the last week…
But on Friday (Sept. 21), buying returned to the U.S. dollar.
That powered the DXY higher from about 93.9 back to 94.25, though still far below highs from earlier in the week. As the proverbial fly in the ointment, these dollar gains pushed gold back to $1,193 by 9 a.m.
It then managed to see a little buying that pulled it back up to $1,199 by late afternoon.
Any clear direction would have to wait for later this week, likely in the wake of the expected Fed rate hike.
And I’m expecting that will support my bullish gold price forecast…
Where Gold Prices Are Heading after the Next Fed Rate Hike
The dollar is finally starting to act the way I’ve been expecting it to.
As the relative strength index and moving average convergence divergence are approaching oversold levels, it would not surprise me to see a small bounce at this point. Anticipation of the Fed rate hike this week could be the support that provides a boost.
You can see these trends, including the support level, here…
If the support bounce materializes, I expect it will only be temporary as traders sell the news.
After that, I think weakness will return.
The DXY looks like it’s headed lower, and a solid close below 92.5 should feed more selling. This, of course, should do wonders for gold.
Don’t be surprised if we first see a near-term decline in gold as the dollar benefits from strength this week. And that would inevitably show up in gold stocks as well.
Though gold is far from overbought, any near-term weakness could easily push it down to retest the recent low around $1,175 once more.
But there’s plenty of room to power higher, especially on the back of a resumed dollar downtrend.
Take a look at the bullish trajectory gold is on…
If you’re looking for a reason why gold has seen so much weakness since April, this may be the answer.
Bloomberg reported that Turkey’s central bank gold holdings have fallen dramatically since mid-June. The theory is that Turkish and other emerging market banks, saddled with dollar-denominated debt, have been forced to sell gold to shore up liquidity.
Many emerging market currencies began weakening earlier this year, then experienced another leg down starting in late April. It’s just a theory, but it’s not unreasonable to surmise that Turkey and other emerging market central and commercial banks became anxious to shore up liquidity as their dollar-denominated debt was getting costlier to pay back.
According to the World Gold Council, Turkey is a big player in the precious metals market. Its central bank gold reserves place it in the top 20 nations worldwide. Several other emerging markets hold surprisingly large gold reserves.
And given the sell-off of the past few months, many such nations could have been selling their liquid gold assets in order to prevent a liquidity crisis.
Ironically, gold’s recent weakness may be telling us just how well it works as crisis insurance.
And owning gold is just one part of how you can protect your personal wealth…
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