How the Gold Spot Price Will React to the Federal Reserve Meeting This Week

Watch for the gold spot price - the price of gold for immediate delivery - to make dramatic moves as the Federal Open Market Committee (FOMC) meets this week.

Gold has already had a volatile morning ahead of the meeting's Tuesday kickoff.

After closing at $1,303.50 an ounce in the previous trading session in New York on Monday, the 24-hour gold spot price - also known as the "World Gold Price" because it reflects gold trading around the world - hit a one-week high very early Tuesday, reaching nearly $1,312 an ounce. But by midmorning, the gold spot price fell 0.42% ($5.50) to $1,298.90 an ounce.

Futures trading volume on Tuesday morning was 80% above the average for the past 100 days for that time of day, according to data compiled by Bloomberg. U.S. gold futures for August delivery were up 0.15% at $1,305.3 per troy ounce.

There are two big policies to watch coming out of the Fed meeting that will significantly affect gold prices...

Gold Spot Price and the Fed's 2 "I's"

All eyes are on possible changes to interest rates and inflation that could come out of the Fed meeting that will run through Tuesday and Wednesday.

Earlier in July, Fed Chairwoman Janet Yellen said that interest rate increases may come "sooner and be more rapid than currently envisioned" should the labor market improve more quickly than anticipated. The Fed has said it won't consider raising interest rates until the unemployment rate hits a range of 5.2% to 5.6%, and inflation rises to a range of 1.7% to 2%. June's unemployment rate was 6.1%, down from 6.3% in May. On Friday, fresh labor market data is scheduled to come out at 8:30 a.m. EDT.

Interest rates are important for gold investors because higher interest rates are bad news for gold prices. Gold prices will typically weaken when rates go up as investors seek out higher-yielding assets.

"It's tough to say how gold prices will react this week, even if we know exactly what the Fed will say," Money Morning Resource Specialist Peter Krauth said on Monday. "However, with low interest rates that are likely to stay low for some time, the opportunity cost of owning gold is next to zero, making it an attractive asset. I actually expect long term-rates to continue to trend downward for some time."

Meanwhile, inflation has been heating up in the last several months.