Gold prices are about to cap off one of the most volatile weeks of the year thanks to the June FOMC meeting.
As gold started to price in an all-but-certain Federal Reserve rate hike, it rallied to a one-week intraday high of $1,276 on Wednesday before the announcement. This surge had investors hoping it was the end of the recent gold price slump, which saw the metal tumble 1.3% from its recent peak of $1,293 on June 6.
But gold eventually closed lower on Wednesday and kept falling on Thursday, showing how the sell-off since June 6 wasn't over despite news that should've been good for gold. As Fed Chair Janet Yellen discounted weaker-than-expected inflation numbers, she opined that the stage was set for inflation to eventually move higher. High inflation typically means higher gold prices because the negative effects of inflation can cause uncertainty in the markets.
However, traders didn't budge. They chose to sell and lock in profits, so gold quickly returned to $1,260 by later that afternoon.
My advice, though, is to watch what gold does in the coming months. I think we could get to $1,300 gold faster than you may think. Beyond that, I think the metal could rally much higher as it gradually climbs out of its current gully.
Before I show you my year-end gold price target, here's a recap of gold's wild week...
How Gold Prices Performed Before and After the FOMC Meeting
After closing at $1,266 on Friday, June 9, gold opened slightly higher at $1,268 and moved sideways throughout the day alongside the U.S. Dollar Index (DXY). It eventually settled flat at $1,266 for no gain.
On Tuesday, June 13, the two-day FOMC meeting kicked off and sent the price of gold lower to $1,264 at the open. After falling to $1,260 early in the morning, it reversed higher to close at the same $1,266 level as the previous session.
Wednesday was the most volatile session of the week. Gold opened at $1,266, then soared to $1,276 early in the morning as the dollar plunged by 50 basis points.
This chart shows how the DXY has trended since last Friday...
The gold price then hit its peak of $1,278 around 11 a.m., before the dollar made a huge resurgence to the 97 level in the afternoon after Yellen announced the rate hike. This dragged gold down 0.5% to close the day at $1,260.
The DXY kept the rally going on Thursday as it rose to the 97.4 level. As expected, gold prices took it on the chin, opening lower at $1,255 and moving down to close at $1,254 for a 0.5% loss.
But the gold price today (Friday, June 16) is telling a different story. It's on track for its first gain of the week, up a modest 0.2% to $1,257. Still, the metal is set to post a weekly loss of 0.7%.
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Despite the Fed's clear responsibility for this week's sell-off, gold price volatility is typically only a short-term reaction to interest rate hikes. For example, the metal fell 4.1% in the two weeks leading up to the March 15 rate hike before surging 7.6% in the month afterward.
That's why I'm not too worried about this week's drop and expect the metal to reach this bold target by the end of the year...
This Is Where the Gold Price Is Headed in 2017
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To better understand what lies ahead, we need to look at what transpired before, during, and after the Fed rate hike.
By 3 p.m. on Wednesday - one hour after the rate hike announcement - this is how the major indexes looked...
And here's what the price of gold was doing right around the same time...
As you can see, not only did gold not like the Fed rate hike, but neither did the stock market nor oil. And on Thursday morning by 10 a.m., there was more follow-through with all of these markets falling even further. Needless to say, none of them liked the stronger greenback and higher rates.
So what does all this mean for the gold price in 2017?
Well, consider that gold's jump came as disappointing economic numbers hit the wires. Retail sales in May fell 0.3%, the biggest decline since January 2016. That indicates Q2 GDP numbers will likely disappoint when they're reported next month.
Yellen's hawkish tone and statements regarding higher inflation during the rate announcement also tanked gold prices. Remember, though, that around the last few rate hikes, gold sometimes rose in the following days. This reaction could be what we'll see this time around, especially with the dollar strengthening. I'm not sure the dollar's going to hold up this rally for much longer.
But I expect the price of gold to rally as inflation quickly outpaces interest rates - a bullish factor for gold. When inflation comes roaring back, it's often with little warning.
Also consider some fundamental aspects of the gold market right now. Since May 30, the total trading volume on gold futures contracts is up 13.8%, from 434,246 to 494,041. This is a historically bullish signal simply because it shows there are more participants in the gold market.
Additionally, gold's still dirt cheap, especially when you factor in inflation as it was calculated back at its last peak in 1980...
On the technical side, the pullback in the price of gold this past week hasn't caused any damage, as the 50-day moving average (blue line) and 200-day moving average are right where they should be...
The bottom line is that with upcoming economic data expected to be poor, odds are good the Fed won't be able to keep hiking rates "as planned" despite its hawkish tone this week. That sets gold up for some strong gains in the coming months.
If we get any further weakness, I'd expect to see the 200-day level hold around $1,243. Beyond that, I expect the gold price to reach $1,270 before too long and $1,400 by the end of 2017.
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