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The widely anticipated September Fed rate hike is now behind us.
And the market's reaction, at least so far, has been right out of the textbook.
The dollar is up, and gold prices are down.
But we know what happens next...
Gold prices will start to rally.
The dollar is still showing signs of having peaked, and gold continues to suggest it's building a base before rallying.
As it turns out, speculators have their biggest futures bets against gold in 17 years. The last time levels were similar was in 2001, and that's when gold rallied by almost 300% in just over 24 months.
There's no guarantee we're at an interim bottom, but the signs are pointing toward those odds.
Fed Rate Hikes Are Good for Gold Prices
The first half of last week brought more gold consolidation with the yellow metal moving within a tight $9 range.
The gold price action was all at the back end of the week, which is no surprise, given participants were waiting for confirmation of the Fed rate hike.
They got it. As expected, gold prices dropped at the expense of the dollar's gain.
Here's what the U.S Dollar Index (DXY) did over the last five trading days...
Little real gains came on Wednesday (Sept. 26) after the Fed hike and press release. Gold prices ended at $1,194, which was the bottom of its recent trading range.
But on Thursday (Sept. 27), the euro dropped, pushing the DXY higher as concern over a possible delay for Italy's budget proposal weighed on the currency. The dollar soared, taking the DXY to 95.3 by mid-morning, a 130-basis-point gain from Tuesday's (Sept. 25) low.
Gold prices were beaten down on Thursday in the wake of euro weakness and a somewhat hawkish outlook from the Fed that rate hikes would continue into 2020.
But traders took dollar profits on Friday (Sept. 28) as the rate hike euphoria wore off. That pushed the DXY back to 95.10 by mid-afternoon, and gold rallied by $10 from $1,183 to $1,193 through the late morning and into the close.
Now, the textbook response from here is to see the start of the next gold price rally.
Here's why - and how high you can expect gold prices to climb to...
My October Gold Price Forecast
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With Friday's close, the dollar index is back up to 95, which is about the level of the 50-day moving average.
But notice that the 50-day moving average (the blue line below) has recently dipped lower, suggesting the trend has indeed shifted downward.
As I had expected last week, we are getting a bounce in the DXY as it had approached oversold levels. But I still think weakness will soon return.
Tariffs and economic strength have boosted the greenback, but that's only going to help for so long. As other nations wean themselves off pricey American imports, the United States will feel the impact. Trump adamantly wants a weaker dollar and talks it down at every opportunity to help favor U.S. exports.
Here are a few interesting charts for gold and gold stocks.
Given Friday's bounce, which doesn't show on this chart, we could be looking at a double bottom in gold prices if it holds.
As for gold stocks, they've shown more relative strength than gold itself.
More interesting is recent action in the Gold Miners Bullish Percent Index ($BPGDM).
When the index turns up from oversold levels (typically below 30), we get a buy signal. If there is solid follow-through, we could be looking at strong gains in gold stocks over the next couple of months.
If we get a gold rally abetted by renewed dollar weakness, then look for gold to quickly cross the $1,210 level (50-day moving average). I'd then expect a push higher to the $1,230 to $1,240 range.