Why the Price of Gold Is Falling After Fed Meeting

Despite the price of gold being up 6.8% in 2017, the metal has been in full sell-off mode recently.

And the May FOMC meeting this week made matters even worse.

The 5.3% drop in gold prices from their April 18 high of $1,294 to their recent $1,225 level should not surprise you. I've been telling you recently that gold would likely fall back to that level.

And by all accounts, it seems the latest "Fedspeak" helped drive what might be the final nail for this gold correction.

After the two-day meeting, the FOMC held interest rates steady at the current 0.75%-1% range and downplayed economic weakness in Q1 as "transitory." The Fed also emphasized a strong labor market to support its stance that two more rate hikes were still likely this year. It also went on to say consumer spending remained strong, businesses were still investing, and inflation was still near its targets.

That helped push the U.S. dollar higher, while the gold price sank to a six-week low. But the dollar's bounce didn't last long and eventually gave up all of its gains and more as gold bounced by Thursday morning.

Now it's looking like gold's retreat from $1,289 to $1,225 may have exhausted itself. If I'm right, we could see a reasonable bounce from here.

I'll tell you exactly where I see the price of gold heading over the next two months. First, let's look at how the metal moved before and after this week's Fed meeting...

Gold Prices on Track for 3% Weekly Loss

After closing at $1,268 on Friday, April 28, the gold price started this week lower at $1,263. It weakened throughout the day as the dollar gained traction. The metal eventually settled at $1,255 for a 1% loss on the day.

On Tuesday, May 2, gold traded mostly sideways as the FOMC began its two-day meeting. It opened lower at $1,254 but gained a slight 0.2% to close the day at $1,257.

Trending: This Is How You'll Profit from Gold This Year

As markets on Wednesday began anticipating the Fed meeting outcome, the dollar strengthened and dragged the price of gold lower. It opened at $1,254 and dropped to $1,249 by the afternoon.  Then, as details emerged on the Fed's decision to stand pat on interest rates, the U.S. Dollar Index (DXY) jumped from 99.10 to 99.40. That pulled gold prices down 1.3% to $1,241 by the close.

You can see in this chart how the DXY saw a huge rally after the Fed announcement on Wednesday...price of gold

On Thursday, risk-on trading kicked back into high gear as investors moved into stocks and away from gold. The DXY also sold off throughout the day, ending around 98.75. And despite the normal support that gold prices get from a weaker dollar, the metal hit an intraday low of $1,225. It eventually logged a 1% loss on the day at $1,228, a level not seen since March 16.

The price of gold today (Friday, May 5) is up a modest 0.2% to $1,230. That puts gold on track for a weekly decline of 3%.

Despite trading near its lowest level in six weeks, I expect it to rebound over both the short term and long term.

Here are my targets for the gold price this year...

My Bullish Outlook for the Price of Gold in 2017

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In last week's column, I said if gold tested the $1,250 level and couldn't hover above it, then we could see it drop even further to near $1,220.

Well, early on Thursday, the gold price did reach as low as $1,225, as you can see in this chart...

price of gold in 2017

That's been the lowest level so far. Meanwhile, the RSI momentum indicator shows gold is likely approaching oversold conditions and could be due for a bounce from here. If that happens, look for the 200-day level of $1,255 to act as both a magnet and overhead resistance level.

As for gold stocks - represented by the Gold Bugs Index (HUI) in the chart below - we see them testing their March lows. That could also act as a support level from here.

gold price

Interestingly, the largest gold stock ETF - the VanEck Vectors Gold Miners Fund (NYSE: GDX) - saw its largest weekly outflow on record the week ended April 28. Roughly $778 million left the fund over that period. This massive outflow indicates selling behavior could be nearing a bottom soon, leading to an increase in buying activity.

On the fundamental side, we know there's been plenty of buying over the last couple of months at this modest price level. For example, India imported over $7 billion of gold in February and March, with March alone up more than 340% year over year.

And for the world's largest gold producer, China, Q1 production numbers fell 9.3%. The drop was likely due to the government's overhaul of mining in general, aiming to phase out unprofitable operations.

In summary, I think gold prices could have bottomed. Look for the metal to rise 2% from the current price to $1,255 in the next few weeks.

If the gold price successfully surpasses that level, then we could see it retest its recent high of $1,289 within the next month or two. That would mark a 4.8% climb from the current price.

Up Next: For only the third time in 20 years, a metal more rare and more exotic than gold is about to make stock market history. And it's poised to make early investors a lot of money. Get the full story.

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