As I predicted last week, gold prices have fallen back below $1,300. They've been below that level since last Thursday, Sept. 20, and the metal is down another 0.1% today at $1,296.
But don't expect that weakness to continue much longer. Once again, last week was all about the U.S. Federal Reserve and the dollar when it came to downward gold price movement.
Despite U.S. President Donald Trump warning during his UN speech Tuesday that he would "totally destroy" North Korea, gold prices remained mostly flat. They closed at $1,311 on both Monday and Tuesday last week.
The metal saw a 0.5% gain on Wednesday after the Fed announced plans to start shrinking its $4.5 trillion balance sheet next month. It will do this by simply not renewing maturing bonds to the tune of $4 billion in mortgage securities and $6 billion in Treasury bonds each month. These amounts will ramp up each quarter to reach $20 billion and $30 billion, respectively.
The Fed also said it would keep the benchmark interest rate unchanged between 1% and 1.25%, while indicating another rate hike was still possible in December. Eleven of the sixteen officials considered a 25 basis point (0.25%) increase "appropriate" by the end of 2017.
But I expect this dollar strength to be temporary. The greenback can't maintain strength as disinflation - or the reduction in the rate of inflation - remains present and shows no signs of leaving.
That means the dollar will likely remain weak. And that implies a rebound for the price of gold through the end of the year.
Before I show you my bullish gold price targets for the end of 2017, here's a closer look at gold's 2% decline last week...
Gold Prices See Weekly Drop of 2.1% (Sept. 15-22)
After closing at $1,325 on Friday, Sept. 15, gold kicked off last week with some weakness. It opened lower at $1,313 and kept dropping throughout the day. The gold price eventually settled at $1,311 for a 1.1% loss on the day.
Tuesday's action was quieter, as the U.S. Dollar Index (DXY) - which measures the dollar against other currencies like the yen and the euro - traded in a tight range between 91.90 and 92. Gold traders hardly budged ahead of the Fed's statement release the following day. The metal closed the day flat at $1,311.
Then the Fed announced Wednesday that it would unwind the balance sheet, which sent the DXY rocketing higher.
Here's how the DXY moved after the Fed's 2 p.m. statement...
As expected, this simultaneously dragged the price of gold roughly 1.4% lower in about 30 minutes...
Their movements were nearly perfect mirror images. The dollar soared as the market interpreted the Fed's statement as hawkish as quantitative tightening - or the Fed unwinding its $4.5 trillion balance sheet - would begin in October and that another rate hike was expected by the end of 2017.
After falling to $1,296 in the wake of the announcement, the gold price managed to rebound from there to close at $1,316. That marked a rise of 0.4% on the day.
Urgent: Executive Editor Bill Patalon just saw something on his precious metals charts he's only seen twice in 20 years. He calls it the "Halley's Comet of investing" - and it could lead to windfall profits. Read more...
But the metal suffered on Thursday even as the dollar fell back to 92.26 that day. The price of gold opened lower at $1,292 and traded close to that level throughout the rest of the session. It settled 1.6% lower at $1,295.
On Friday, Sept. 22, the DXY tested down to 91.81 but trended higher to 92.16 by early afternoon. That didn't impede a slight recovery from gold, which jumped 0.2% on the day to close at $1,298. Despite that gain, gold still posted a weekly loss of 2.1%.
And the gold price today (Monday, Sept. 25) is down another 0.1% and trading at $1,296.
The dollar's rebound from the two-and-a-half-year low on Sept. 8 has dominated the gold price narrative. Since that date, gold has fallen 4.1% to today's $1,296 price.
I think the dollar will continue to be the most important factor to watch for gold moving forward. Although the DXY may continue higher from here in the short term, I see it eventually falling back and giving way to a strong surge in gold prices by 2018.
Here's my bold gold price prediction for the end of the year...
Price of Gold Could Reach This Bullish Target Before 2018
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Last week, I suggested watching for the DXY to put in a new "higher low" above the 91 level. Well, Friday's morning dip to 91.81 may have been it.
Despite its pullback from Wednesday's high, I think the dollar index could start to climb higher again from here...
The DXY looks like it's bottoming, and the technical strength indicators seem to be agreeing. The RSI (relative strength index) momentum indicator (highlighted, top of the chart) is still near neutral, but the MACD (moving average convergence divergence) indicator (highlighted, bottom of chart) has turned higher.
With those in mind, I'm still looking for the DXY to climb into the 94-96 range before it heads back lower. That should keep a lid on the gold price for a bit, but I think it could hang in the $1,290-$1,310 range as the dollar bounces...
Going all the way back to the early 1970s, we've known that gold typically performs well when the dollar has been in a downtrend. Gold is priced in the dollar, so when it weakens, users of other currencies can buy more gold at a better exchange rate. This inevitably lifts demand and therefore the gold price.
After the current gold correction runs its course, which may only be a matter of weeks, look for gold to make a run toward last year's peak of $1,362. That would be a 5.1% climb from today's price.
Beyond that, expect gold to reach $1,400 before 2018 - an 8% gain from the current price.
Up Next: Rare Gold Anomaly
Money Morning Executive Editor Bill Patalon just caught something on his gold charts that he's only seen twice in the past 20 years. A $13 billion gold anomaly he calls the "Halley's Comet of investing."
It's very rare, and fleeting, and Bill sees things lining up perfectly to bring some very sizable precious metal profits to well-positioned investors.
Click here to check out his research...
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