Although the price of gold struggled through another difficult week, its action suggests some resilience.
Recent price inflation data from the U.S. Commerce Department for July has the indicator finally back at 2%, the Fed’s target level.
Specifically, it’s the core personal consumption expenditures (PCE) price index that the Fed pays most attention to.
This has helped peg the CME Group’s FedWatch tool for a September rate hike at 99.8% probability.
I believe the market is looking ahead to that, along with the effects of ongoing emerging markets currencies continuing to weaken substantially, which are supporting the U.S. dollar.
Of course, that makes for gold price headwinds. But gold’s price action suggests it may have put in a bullish higher low. What’s more, speculators have recently pushed their short positions to outsized record levels.
That’s a strong contrarian indicator, possibly providing more support for gold’s price stabilizing before it rallies higher.
Here’s How the Price of Gold Is Trending Now
Gold prices faced a considerable challenge over the past week, as the U.S. dollar index (DXY) found some renewed strength. The DXY didn’t rise back to its recent high of 97, but it did make a run up to near 95.75.
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That was a gain of over 100 basis points since its recent bottom on Aug. 29 at 94.60.
The most notable aspect of gold‘s action this week was on Tuesday, when the metal dropped to $1,190 just after 10 a.m. Naturally, that coincided nearly perfectly with a surge in the DXY that took the index up to 95.68.
That’s been the low for the price of gold since then. On dollar weakness early Thursday that then pushed the DXY back down to 95, gold rose to a momentary $1,205 before the dollar strengthened once again.
Here’s the DXY for the past trading week:
Renewed greenback strength on Friday came as a U.S. employment report was a bit stronger than expected. That pushed gold below $1,200 once again as the metal fought to hold near the $1,197 level and the shortened trading week drew to a close.
Now, here’s my outlook for the price of gold from here…
Here’s Where the Price of Gold Goes from Here
We’ve seen some sporadic strength in the dollar over the past week.
It’s possible this will hold up for a while, as I think the market’s looking ahead to a likely Fed rate hike later this month, and emerging markets are now officially in a bear market.
But if we look at some of the technicals for the DXY, the story’s a bit different.
We can see that the relative strength index and moving average convergence divergence momentum indicators are still trending downward, confirming the recent weakness in the DXY since peaking at 97 in mid-August.
It’s possible the dollar will hold around 95 for the next few weeks, until the Fed rate is confirmed. After that, it wouldn’t be surprising to see the dollar return to a downward trend, supporting gold in the process.
If this scenario plays out, gold could be stuck in a range between $1,190 and $1,210 until then.
In my view, gold’s recent price action has a silver lining. Despite bouncing back and forth above and below the $1,200 mark, it has at least stayed in close range to that level.
And there’s positive divergence between gold stocks and their technicals.
The momentum indicators are dramatically oversold, and they are trending higher despite the GDX having just made a lower low.
That could be a mark of capitulation as gold stocks approach prices from early 2016.
As I said above, speculators in gold futures have pushed their total open short position to extreme record high levels. Odds are good we’re getting to maximum pessimism, where there’s no one left to sell.
Then those shorts will have to be covered, and the resulting squeeze could be powerful.
I think gold could move within the $1,190 – $1,210 range for the next week or two. Then as the Fed rate hike becomes old news and a short squeeze takes hold, gold could quickly pop to $1,225 and beyond.
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