How Gold Prices Will Respond to the Coming Fed Rate Hike

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Between Bitcoin prices surging to nearly $17,000 and oil prices reaching yearly highs, it’s no wonder gold prices have fallen this week. And now the Federal Reserve is set to hike interest rates this week…

According to the CME Group, the probability of a Fed rate hike on Dec. 13 is currently at 90.2%.  That’s powering the U.S. Dollar Index (DXY), which has gained nearly 100 basis points in the past week.

These are all formidable headwinds for the gold price.

But there’s light at the end of this tunnel, and the tunnel may be shorter than you think…

Why the Price of Gold Has Fallen

Gold prices

Before we show you how the Fed’s rate hike decision will move gold prices, here’s a look at last week’s gold price action.

Gold’s start to the last trading week was innocuous. In late Sunday evening trading, gold gave up about $5, then opened a few dollars lower, at $1,273, on Monday, Dec. 4. Slight DXY weakness helped gold as the trading day wore on, and the metal clawed back to close at $1,276.

Urgent: Executive Editor Bill Patalon just saw something on his precious metals charts he’s only seen twice in 20 years. He calls it the “Halley’s Comet of investing” – and it could lead to windfall profits. Read more…

Tuesday punished gold, as the DXY enjoyed a new surge that took it up to 93.45. So gold, which opened at $1,273, quickly sold off to $1,264 by 11:00 a.m., then attracted some bargain hunters. That helped buoy gold prices, which managed to regain $2 from the late-morning low, to close at $1,266.

Wednesday would bring similar action as Tuesday, only milder. Gold opened at $1,266, then ground slowly lower as the DXY peaked at 93.63 around midday. Although the DXY reversed a little, to 93.55 by 5:00 p.m., gold selling pressure continued, and the metal closed at $1,263.

Here’s the U.S. Dollar Index action of the past week.


On Thursday, gold selling intensified, as technical traders saw gold prices below $1,260 as a signal to jump ship.

News that U.S. jobless claims fell by 2,000, to 236,000, supported expectations of a December Fed rate hike. The DXY peaked just before 8:00 a.m. at 93.73, then weakened to 93.55 just after 1:00 p.m., and then reversed higher to 93.75 by 5:00 p.m. That would cause the price of gold to open at $1,256 and rapidly drop to $1,246 by 3:00 p.m., rebounding slightly to $1,247 at 5:00 p.m.

Unless we see any real further weakness in the days ahead – and we may – Thursday may turn out to have been gold’s final sell-off capitulation. At least Friday’s gold price action didn’t pull the metal still lower.

And that was with the DXY, which rose further, spending the early morning hours well above 94. The DXY dropped back to 93.9 around 9:00 a.m., climbing back above 94 around 11:00 a.m., then retreated to 93.9 into late afternoon. Through this, gold opened at $1,248, and with a little movement both up and down, it still closed at that same price.

Now, let’s look at how gold will respond to a new interest rate hike, including our latest gold price prediction

What a Rate Hike Will Do to Gold Prices

I’ve been warning for some time that a stronger dollar could easily remain a challenge for higher gold prices, but the dollar may have peaked. It’s time for a gold price rally…

Check out how the dollar’s value has been associated with gold prices since June…

gold price

Now we need to watch how the dollar behaves and what it does next.

Interestingly, gold peaked just when the DXY bottomed in early September.

price of gold

Remember, the last two December Fed rate hikes helped the DXY enjoy rallies, but these would turn out to be short-lived. At this point, a rate hike is likely close to completely priced in for the dollar.

gold price action

From its December 2015 low, gold went on to gain 19% in just two months. And from its December 2016 low, the metal then gained 9% in the following two months. Have a look…

gold price prediction

In each of these last two instances, gold bottomed within days of the Fed’s December rate hike.  In spite of all the headwinds gold’s had to face over the past years and months, it’s held up surprisingly well.

Consider these comments on Friday by Jason Goepfert, the president of Sundial Capital Research.

“Gold fell below its 200-day average for the first time in more than 6 months this week. It also suffered its worst weekly loss in more than 6 months. Both events have led to mostly positive expectations over the next 2-4 weeks and 6-12 months, especially when they occurred relatively close to each other.”

On that note, gold could be very close to a new rally. If it turns around before or soon after the Fed’s decision on Dec. 13, look for the yellow metal to regain the $1,280-$1,300 range by year’s end, and even $1,350 by February.


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