Gold prices have kept falling this week, with the metal on track for a 2.6% decline to $1,210 since Friday, June 30. This comes after posting a 1.1% drop the previous week (June 23-30).
The changing value of the dollar has hurt the price of gold. The 200-basis-point sell-off in the U.S. Dollar Index (DXY) from June 26 to June 29 took the greenback into oversold territory. That meant a relief rally for the dollar was likely, and when it arrived this week, it naturally hit gold prices hard.
As we know, a stronger dollar is bad for gold prices. Since gold is priced in dollars, any strength in the currency makes the metal more expensive to users of other currencies. This reduces demand and lowers gold prices.
But with a quick return to bear mode, I think gold may have finally reached its bottom by now.
This week's activity has all the signs of a capitulation sell-off - an indicator that everyone who wanted to sell their gold positions has done so by now. With most of the selling behavior finished with, prices have nowhere to go but up.
But investors still fear that the price of gold could go even lower. While that's certainly possible in the short term, I expect it to make a 15.7% rebound through the end of Q4 2017.
Before I tell why I'm so bullish on gold prices, let's look more closely at gold's volatile week...
Gold Prices Are Set for a 2.6% Weekly Drop (June 30 - July 7)
After settling at $1,241 on Friday, June 30, the gold price opened lower on Monday, July 3, at $1,233. It quickly sank to $1,222 in morning trading and eventually closed the session at $1,220 for a 1.7% decline.
Tuesday brought a small relief rally, even as the DXY headed a little higher. The price of gold opened at $1,225, but gave back a little on the shorter holiday trading schedule, ending early at $1,223 for 0.2% gain.
Here's how the DXY has trended this past week...
On Wednesday, July 5, as the DXY mustered another leg higher to peak at 96.50, the gold price started lower at $1,221. From there, it bounced back as the DXY retreated, and the metal managed a meager 0.3% gain to $1,227.
Even as the DXY stayed in retreat mode on Thursday, the price of gold managed to consolidate sideways. It opened lower again at $1,225 and by the close maintained that level for a 0.2% loss on the day.
And as of this writing, the gold price today (Friday, July 7) is down another 1.2% and trading at $1,210. If it closes at this level, gold will post a weekly decline of 2.6%.
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With all of this week's volatility, what is it about the recent gold price performance that justifies my bullish 15.7% predicted price gain?
Here are the technical factors that indicate a rebound for the price of gold in 2017...
Why I Expect the Gold Price to Rise 15.7% Through the Rest of 2017
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The first thing I want to point out in gold's technical price behavior is the sharp 1.7% drop on Monday...
Monday's drop looks like a capitulation sell-off to me, which means that mostly everyone who wanted to sell has already done so. And, interestingly, July 5 only saw a small 0.3% gain, but it came on big volume.
But an even more bullish sign for gold prices is the "triple bottom," which indicates a pattern of bottoming that we're seeing taking shape right now...
Gold stocks, as represented by the HUI Gold Bugs Index, may also be putting in a triple bottom (indicated by the green line in this chart below)...
As you can see, we're currently seeing the third bottom in the triple bottom. That means gold looks like it could see a big leap higher from here.
The same goes for the HUI-to-gold ratio (gold stocks to gold prices), which you can see in the chart below...
And finally, if we look at the Gold Miners Bullish Percent Index (BPGDM) - which measures overbought and oversold conditions for gold mining stocks - its recent drop below 30 provides considerable ammunition for gold stocks being ready to reverse and head higher...
When this indicator rises above 30 in a sustained way, gold stocks should start a strong new rally.
Although the price of gold could well dip lower in the short term, with $1,200 as a target, I think the odds favor a rally...
I expect gold to rise 2.5% from the current $1,210 level to $1,240 (around the 200-day moving average), then a further leg up would likely target around $1,260.
Beyond that, I see the metal hitting $1,400 by the end of the fourth quarter. That would be a 15.7% increase from today's price.
The Bottom Line: Gold's 2.6% decline this week has rattled investors and traders looking for prices to crawl out of the gully. But that loss this week is just a short-term reaction to the strengthening dollar. I still forecast gold prices to rise 15.7% to $1,400 by the end of 2017.
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