Gold prices are coming off their second straight weekly loss as the dollar continues to rally from its Sept. 8 bottom. The metal dropped 0.7% from Friday, Oct. 20, to Friday, Oct. 27.
But you can’t say I didn’t warn you. I’ve been telling you for some time that the U.S. dollar had likely bottomed at that two-and-a-half-year low on Sept. 8 after an eight-month sell-off that began early this year.
Simply put, the dollar bear trade had gotten overly crowded and was due for a countertrend rally. That’s why the U.S. Dollar Index (DXY) is up from 91.35 on Sept. 8 to 94.75 today (Monday, Oct. 30).
The index is up an impressive 3.7% over nearly two months, and I think it will likely run even higher. Its momentum has been the biggest obstacle keeping gold from regaining – and holding – the $1,300 level.
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We also have Trump’s new tax cuts, which could make their way through Congress soon. The Dow Jones is up 2.2% in the last two weeks in anticipation of lower taxes, sucking away investor interest from precious metals and dragging prices lower.
In the near term, gold price sentiment could remain negative. But the metal could surprisingly push higher when the least number of investors and traders expect it. I think gold will start to rebound once the DXY hits the 96 to 97 range, which is where the dollar could top out.
Today, I’m going to show you why I’m still bullish on gold through the rest of the year. But first, let’s take a closer look at the yellow metal’s performance last week…
Gold Prices Tumble 0.7% Last Week (Oct. 20-27)
After closing at $1,281 on Friday, Oct. 20, the gold price opened lower, at $1,275, on Monday, Oct. 23, thanks to mild DXY strength. The index tested the 94 level several times during the session, but eventually closed just short of 94 at 93.94. This movement caused gold to settle at $1,281 for no gain on the day.
On Tuesday, Oct. 24, a weakening dollar wasn’t enough to give the price of golda bump higher. As the DXY fell from 93.94 to 93.77 that session, the metal opened at $1,276 and steadied near there for the rest of the session. It eventually closed at $1,278 for a 0.2% loss from the previous close.
This chart shows how the DXY trended last week…
Gold prices were largely flat again on Wednesday, opening lower at $1,273 before heading back to the $1,278 level. The DXY tumbled toward the 93.60 level, which ultimately boosted gold to $1,279 for a small 0.07% gain.
But the dollar rebounded strongly on Thursday, and for good reason. The European Central Bank (ECB) not only left interest rates unchanged, but it also announced plans to scale back its bond-buying program.
The news tanked the euro – the currency most heavily weighted in the DXY – and lit a fire under the index, which touched a low of 93.5 in the morning before surging to 94.79 that evening. This sent gold spiraling downward, ending the day at $1,270 for a 0.7% loss.
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On Friday, Oct. 27, the dollar pushed past the 95 level during morning trading. While the gold price opened lower at $1,266, it was lifted by the DXY pulling back to 94.80. By the end of the session, the metal was trading at $1,272. That marked a 0.2% gain for the day, but a 0.7% decline for the week.
The price of gold today (Monday, Oct. 30) is starting the week strong. It’s up a slight 0.1% and trading at $1,273.
The story surrounding gold prices since early September has been all about the dollar. That hasn’t changed for a while, nor do I expect it to. Since gold is priced in the dollar, any gains in the currency make gold more expensive to people using other currencies. This lowers demand and therefore drags the price of gold lower.
But a recent report shows that the dollar’s momentum could continue in the short term but not the long term. I see it losing steam in the next few weeks or so, eventually giving way to a strong rebound for gold.
Here’s my bullish gold price forecast through the last two months of 2017…
This Is Where Gold Prices Are Heading Before the Start of 2018
A report released last Friday from the Commodity Futures Trading Commission (CFTC) – which monitors futures markets for everything from oil to the dollar – shows there’s basically no one left to sell the dollar.
The report showed traders lowered their short bets on the dollar by $3.7 billion to $1 billion – the lowest since July. This means that bullish sentiment is at a Q3 high, meaning it will likely peak sometime soon and result in a lower DXY.
With the DXY already near 95, here’s my target range…
We last reached the 96 to 97 range in June, and that’s where I think the DXY will top out before heading lower. The high end of that range also happens to be near the index’s 200-day moving average of 96.91.
Of course, this has only weighed further on gold sentiment, which is why I’ve noted potential bottoms for the gold price below…
I’ve drawn three lines indicating my near-term downside targets if gold moves lower. These are $1,260 (near the 200-day moving average of $1,259.36), $1,240, and $1,220. Ultimately, if sentiment gets really bad, we might even see gold test the $1,200 level.
But as the RSI and MACD momentum indicators (highlighted) show, we’re already close to sufficiently oversold levels. That means I don’t think gold prices will remain lower for longer.
Meanwhile, Netherlands-based ABN AMRO Bank said in its Monthly Commodity Update that gold prices look positive in the long term. The main reason for the bullish outlook is a weaker U.S. dollar by the end of next year.
While the dollar’s been gaining, I still think it’s just a temporary countertrend rally, with the overall direction soon heading south once again.
That means now is a great time to buy gold, since it trades at a discounted price. I still think gold could reach $1,400 by the end of 2017. That would represent a 10% rebound from today’s $1,273 level.
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