Why the Gold Price Can Rally Higher in 2017 Thanks to the Dollar

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After a strong 2.3% gain for the gold price last week, investors shifted back into selling mode on Monday and Tuesday. However, gold prices are still on track to end this week on a high note. Right now, they’re set for a weekly gain of 0.6%.

The price of gold’s rally last week mostly came on the back of a heated exchange between President Trump and North Korean leader Kim Jong Un. After Trump said on Aug. 8 that North Korea would be met with “fire and fury” if it kept threatening the United States, North Korea threatened to launch missiles at Guam.

But as this new trading week began, the news faded and those tensions abated after Kim Jong Un rescinded the threat. This dragged gold 1.1% lower over the first two days of the week.

The minutes from the July FOMC meeting were released Wednesday and hung in the foreground as gold prices got a bump up to $1,284. This mostly came from sharp division among Fed members.

One side of the committee says the Fed should be cautious in today’s low inflation environment. Meanwhile, the other side is arguing for more rate hikes this year as a way to curb risks arising from a potential full-employment labor market.

At the same time, the Federal Reserve reiterated its commitment to shrinking its $4.5 trillion balance sheet. That has many observers concerned about diminished liquidity, which could benefit gold investors in the process.

Here’s a review of gold’s recent price action and where I think gold is headed as we move into the final months of 2017…

Why the Gold Price Is Up 0.6% This Week (Aug. 11 – Aug. 18)

After settling at $1,294 on Friday, Aug. 11, the price of gold opened lower at $1,282 on Monday, Aug. 14, as investors moved away from metals and into stocks. The Dow Jones Industrial Average climbed 0.6% that day as gold struggled to break back above the $1,290 level. The metal eventually settled at $1,290, which, despite being above the open, still marked a small 0.3% drop from Friday’s close.

Urgent: An incredibly rare gold anomaly is shaping up in the markets as we speak – one that has occurred ONLY twice in the past 20 years. And it’s about to happen again. Details here

Tuesday saw an even bigger decline for gold prices as the U.S. Dollar Index (DXY) spiked above the 94 level in morning trading. That caused a gold sell-off, with prices falling 0.8% to close the day at $1,280.

Here’s a look at dollar’s performance this past week…

Then on Wednesday, Aug. 16, the DXY sold off in anticipation of the Fed’s minutes, and it was on track. The Fed’s dovish stance on rate hikes thanks to persistently low inflation tanked the dollar 50 basis points from 94 to 93.50 within just two hours. This pushed gold prices to $1,283 by the close for a daily gain of 0.2%.

The DXY’s sell-off continued overnight and into Thursday morning, which boosted gold to $1,288. Prices steadied at that level throughout the day as stocks fell 1.2% and investors sought gold as a safe haven. The metal closed at $1,288 for a 0.4% rise on the day.

And the gold price today (Friday, Aug. 18) is up another 0.7% and trading at $1,302. If it closes the session at this level, gold will have posted a weekly gain of 0.6%.

Despite the swinging stock market having the most impact on gold early in the week, I think the U.S. dollar will be a big factor for gold prices the rest of 2017.

Here’s what I forecast for both gold and the dollar over the next four months…

My Dollar and Gold Price Predictions for the Rest of 2017

What could we see in gold’s future within the current context?

With the dollar having so much daily price influence on gold, I think the precious metal could continue to consolidate a little longer. That’s because I expect the dollar will continue its dead cat bounce – a term for a temporary rebound in a long-declining asset – for a little while still.

As you can see in the chart below, the dollar is down 9.1% this year, even hitting a two-and-a-half-year low of 92.84 on Aug. 3…

The DXY only just recently hit an interim bottom before bouncing. It’s up 0.6% from that Aug. 3 low.

In my view, the dollar could climb a bit more, especially if stocks experience a correction in the face of the Fed sounding dovish. It could end up being little more than a short contrarian rally, since the “short dollar” trade had gotten so crowded. I expect the DXY to top out near its 50-day moving average around the 95 level before heading back lower.

As for the price of gold, I think it could keep rising as the relative strength index (RSI) and moving average convergence divergence (MACD) – two gold price strength indicators – have also been moving higher…

All of that being said, I still think gold can reach $1,400 before the year is out, especially with furtive rate hikes and a possibly weaker dollar all looming. That price target marks a 7.5% rally from the current price.

 

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