It looks like the awaited correction in gold prices could finally be here, courtesy of the U.S. Federal Reserve.
On Wednesday, May 18, the April FOMC meeting minutes were released. That was the impetus for the 1.1% decline in the price of gold so far this week.
The minutes revealed some FOMC members were favorable towards an April rate hike. Most members also felt a June rate hike was appropriate if economic data signaled improvement in the second quarter.
Does that mean the gold price rally is over? Or is the dip just a temporary result of the rate hike chatter?
Let's look at the gold price action this past week, and then I'll forecast where gold prices could be headed in the near term...
The Volatility in Gold Prices This Week
Gold ended the last trading week on Friday, May 13, with little fanfare. It opened for NY trading at $1,276, soon dropped by $10 to $1,266, but then recovered gradually to close at $1,273.
The price of gold kicked the week off on a relatively flat note. On Monday, May 16, prices rose in early morning trading but couldn't hold those gains throughout the day. Gold prices ended up closing at $1,274.20 for a slight 0.1% gain. Gold ticked up again the next day, jumping 0.4% to settle at $1,279.
But volatility kicked in on Wednesday, May 18. After weakening overnight, the gold price plunged by nearly $20 immediately after the release of the Fed minutes. It leveled off by late afternoon and closed down 1.6% to $1,258.
For comparison, here's how the U.S. Dollar Index trended this past week.
Notice the dollar's surge around 2 p.m. on Wednesday from about 94.55 to 95.10. Of course, that reaction came in the wake of the FOMC minutes, which put the possibility of a June rate hike clearly on the table.
On Thursday, May 19, strength in the dollar followed through. By midday trading, the DXY was up near 95.34, having touched 95.50 a little earlier. This pulled gold prices 0.3% lower to $1,254.80.
The gold price today (Friday, May 20) has seen a slight rebound. As of 9:20 a.m., gold prices were up 0.3% to $1,258.10.
Although the price of gold is up today, volatility may continue in the short term.
Right now, it's important for investors to keep an eye on this specific price level.
That's because this price target will indicate whether gold prices have a bearish or bullish path ahead in 2016...
This Price Target Will Dictate the Path of Gold Prices in 2016
Gold fell a long way from its $1,287 peak on Monday, which has many traders convinced the gold price is correcting.
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As I pointed out, the FOMC minutes, which showed support for an April rate hike and even more for June, boosted the dollar. The rise in the DXY naturally weighed on the gold price.
I've also been telling you for weeks about the likely correction or consolidation in gold prices. One of the reasons why I saw this coming was the Commitment of Traders (COT) reports. The COT found that smart money - or investments from large commercial hedgers - is near an all-time extreme net short position.
The other was possible exhaustion after the price of gold had a strong rally since late January. Since Jan. 29, prices have surged 12.7%.
Wednesday's action could be the beginning of this correction. However, gold's performance on Thursday first saw follow-through weakness, then a strong reversal. Gold stocks also closed higher from the previous day's close.
At this juncture, I suggest you closely watch the $1,252 price level. That's the 50-day moving average. A close below that will be bearish, and the next target would be the $1,220 level.
The Bottom Line: Thanks to the FOMC minutes and strengthening dollar, gold prices struggled to post gains this past week. These factors – combined with short positions from commercial traders – may cause some more losses over the short term. Right now, it’s important to see if the gold price touches $1,252. That will indicate whether or not gold prices have a bearish path ahead of them.
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