A renewed surge in strength for the U.S. dollar sunk gold prices over the past week, but we're about to enter gold's strongest season of the year.
As the U.S. Dollar Index (DXY) made a renewed run to about 97.50, stocks and commodities suffered the consequences.
It seems the White House is being pressured by big business to finally cut a deal with China, which U.S. President Donald Trump has recently said was near.
That, combined with a weaker pound on Brexit concerns and a weaker euro on Italian crisis worries, have conspired for a dollar rally that has pushed oil and commodities lower.
But the rout in equities may not be over yet as stocks struggle to maintain any gains for the year so far. The Dow plummeted nearly 600 points yesterday (Nov. 12).
Still, as we work through what is gold's strongest seasonal period of the year, we'll have to see if dollar strength will be enough to hold back the metal of kings.
I'll show you exactly why I think the price of gold is positioned to gain over the next two months, even in the face of a strengthening dollar. But first, let's take a look at the gold price action over the last week...
Why Gold Prices Struggled Last Week
Without any question, it was a rough week for gold prices, which couldn't get any traction to push higher.
The November FOMC meeting last week proved hawkish, boosting the dollar and denting gold.
With estimates for the October U.S. CPI to come in at 2.5% year over year, along with a stronger-than-expected Producer Price Index report last week and expected gains in the U.S. retail sales report this week, the dollar is riding high.
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The price of gold headed only lower last week, starting out near $1,230 and ending the week $21 lower, at $1,209.
Meanwhile, the DXY was treading water early in the week, floating steadily around 96.3 through Tuesday (Oct. 6).
It then bottomed early on Wednesday (Oct. 7) around 95.7, then proceeded to climb very steadily from there.
Take a look at how it grew since bottoming on Wednesday...
By Friday (Oct. 9), the DXY was flirting with 97, comfortably reaching that level by late in the day.
And the gold chart was nearly the perfect mirror. By Friday morning, gold prices had sunk to $1,207 before recuperating to close at $1,209.
Then on Monday (Oct. 12), another surge in the DXY pulled the index back up to 97.5, punishing gold as it scraped along, bouncing with great difficulty from the $1,202 level and finally closing at $1,200.
That's understandably made gold bugs fearful we're entering a bear market. But this is simply a short-term aberration thanks to the Fed and the DXY's gains over the last week.
This is just the start of gold's traditionally strongest season, and my gold price forecast based on the data I'm following shows that's just as true this year...
What Seasonal Strength Means for Gold Prices This Year
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The DXY just reached a 16-month high, with many wondering just how much is left in the tank.
Recent positive economic data and news have been supporting the dollar and causing it to rally hard.
But observers are now looking ahead to the December FOMC meeting. It's entirely possible that, thanks to last week's hawkish Fed tone, the markets are now fully pricing in a rate hike for December.
If that's the case, we could well see the DXY top out very shortly. Perhaps current levels will prove to be a sort of "double top" near 97.3.
There's no denying that further strength is likely to hit gold prices.
Gold itself has therefore taken a hit.
Recent weakness has negated much of October's strength, pushing gold back below its 50-day moving average at $1,213. We can also see the RSI and MACD have clearly turned lower, suggesting negative momentum in the near term.
More dollar strength could mean a retest of $1,190, or even a bit lower, before a final bottom.
Meanwhile, gold stocks have followed along with a commensurate dip in the VanEck Gold Miners ETF (NYSE: GDX).
But mean reversion suggests gold's price needs to catch up with where gold actually should be.
Commodities brokerage SP Angel recently said that ETF investors and hedge funds haven't been abandoning gold. "Holdings in exchange-traded funds backed by gold have risen for five straight weeks, the longest stretch in more than a year," SP Angel says.
Wells Fargo said they expect gold to rally into late 2018 and early 2019, even if stocks maintain their strength. The bank's John LaForge, head of Real Asset Strategy, says the brokerage's rolling 12-month target is $1,300. His report also says gold is cheap relative to both stocks and bonds, and could rally even if the U.S. dollar does too.
Gold could remain challenged in the near term, especially if the U.S. dollar maintains its strength or even rises further.
Be prepared for gold to test the $1,190 or even $1,180 level before bottoming. After that, a year-end rally could be in the cards, especially if stocks continue to struggle for a while.
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