What the Next Fed Rate Hike Means for Gold Prices in 2018

This is a syndicated repost courtesy of Money Morning. To view original, click here. Reposted with permission.

With gold prices still trading tightly in the $1,200 price range, the yellow metal can’t seem to gather any momentum. But that’s about to change…

Even with the relative weakness exhibited by the U.S. dollar in the last week or so, the price of gold has been unable to break through its resistance level.

And gold traders continue to wait for a catalyst to drive the gold price direction.

stock market

Barring unforeseen events, it seems that gold price catalyst is most likely to be the next Fed rate hike, widely expected by late September.

Plus, if history is any guide, we could see a final bout of strength in the dollar in anticipation of that hike, coupled with a final bout of gold weakness.

But once that hike becomes a reality, those reactions could well reverse, as we’ve often seen before.

And then we could have gold prices kick into a long overdue rally.

Today I’m going to show you what’s been keeping gold trading within its tight range – and what the next Fed interest rate hike will mean for gold prices in 2018

What’s Keeping Gold Prices Bottled Up

The price of gold moved mostly sideways through to the middle of last week, bouncing in a tight range above and below the $1,195 price level.

Meanwhile, the U.S. Dollar Index (DXY) did essentially the same, for its part oscillating around the 95.15 level as traders awaited some sort of trigger.

Urgent: This catastrophe could bring the U.S. economy to its knees – and make the Great Recession seem like a day at the beach. Read more…

That finally came on Thursday (Sept. 13) as China welcomed an invitation from the United States to talk trade in an effort to stave off Trump’s threatened $200 billion tariffs on Chinese goods.

You can see how the trade war news rippled through the DXY in last week’s chart…

dxy at 94.93

Plus, a report showing that U.S. consumer prices had increased by 0.2% in August, a pace slower than expected, eased some inflation fears.

The lackluster inflation news sent the DXY down and gold up. The DXY hit 94.5 on the news while gold popped to $1,212 momentarily.

But that was fleeting as the gold price then reversed and closed at $1,204, but still solidly above $1,200.

Then on Friday (Sept. 14), a small bump in industrial production for August, along with news Trump told aides to proceed with another $200 billion in tariffs on Chinese goods, levitated the DXY to 94.9 by early afternoon.

Despite the trade war news, gold prices kept trading within a small range.

That’s going to change when the Fed raises interest rates for the last time in 2018.

My latest gold price forecast showed that could be just the catalyst gold needs for a bull market run to close out the year…

My Latest Gold Price Prediction for 2018

One of the key indicators for gold prices is the value of the dollar. And the DXY has been trending downward over the last two months.

You can see this slow decline in the DXY’s six-month chart…

USD

It’s worth noting that both the relative strength index (RSI) and moving average convergence divergence (MACD) momentum indicators also confirm the overall downward trend in the dollar index since mid August.

I still think the current bias is going to be a consolidation around the 95 level, at least until the next expected rate hike in about a week and a half. After that, I expect renewed dollar weakness.

As for gold, the recent price action suggests a bottom is likely in.

Since trading down to about $1,175 in mid-August, gold has put in a few higher lows and the early September low of $1,192 seems to be holding.

Take a look…

gold at 49

If we look at the action in gold stocks relative to gold, the recent action is extreme.

We recently hit ratio levels at their highest since gold stocks bottomed shortly after gold did in December 2015.

Notice how both the RSI and MACD indicators have soared…

gold-gdx

This tells us gold stocks have become ultra cheap compared to gold as a major capitulation sell-off took gold stocks to their lowest since the multi-year gold correction ended in 2015.

Of course, this was triggered by record gold-futures short selling in recent weeks.

But this leaves gold and gold stocks dramatically oversold and undervalued.

Speculator sentiment has simply reached an extreme low.

Meanwhile, even unlikely gold proponent Morgan Stanley has just recommended a 3 to 5% gold allocation, saying it’s a tactical asset with strong potential right now.

If the confirmation of the Fed rate hike comes as expected in late September, we could see a big mean reversion, which could take gold to about $1,225 and then on to $1,260 or beyond.

 

To get full access to all Money Morning content, click here

About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.

Disclaimer: © 2018 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201.

The post What the Next Fed Rate Hike Means for Gold Prices in 2018 appeared first on Money Morning – We Make Investing Profitable.

Wall Street Examiner Disclosure:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I am a contractor for Money Map Press, publisher of Money Morning, Sure Money, and other information products. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. In some cases I receive promotional consideration on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.

Leave a Reply