The latest gold price rally is finally breaking out like I’ve been expecting, and it’s not slowing down soon.
The price of gold soared $30 higher on Thursday (Oct. 11).
Odds are a short squeeze in the futures market helped power the metal as stocks sold off dramatically. Speculators have been massively short gold, and a substantial move like this forces many to cover their positions.
Technical buying was likely triggered as gold traded above certain key price levels, spurring even more buying.
But now that we’ve gotten this substantial jump in the gold price, will it be able to hold, and what should we be looking for next?
I’ll tackle that in my latest gold price forecast below, but first let’s take a look at what sent gold prices soaring last week…
Why the Price of Gold Rose Last Week
Gold prices plummeted to scrape close to last month’s bottom near $1,185. Gold dropped in early Monday (Oct. 8) trading to those low levels as a renewed rally in the dollar weighed once again.
The U.S. Dollar Index (DXY) traded up to 96 on early Monday before retreating to consolidate near 95.75. Then on Tuesday (Oct. 8) it rallied again, this time to a peak of 96.14 just before 8 a.m., only to retreat once again to around 95.60.
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But that was enough to block any gold strength, and the metal traded sideways.
On Wednesday (Oct. 9) the DXY was unable to hold 95.5, and that allowed gold to push up to $1,194 by the close. That was thanks in part to the stock market’s sudden plunge.
The S&P 500 dropped 95 points (3.3%), the Dow lost 830 points (3.15%), ten-year treasuries rose to regain 3.22% yield, and gold saw mild gains, but gold stocks bounced back with the GDX up 1.3%.
Take a look at how the DXY started its slide on Wednesday…
But the fireworks in the gold market showed up Thursday.
Gold enjoyed safe-haven buying in the morning to $1,210 as stock markets suffered a global sell-off. By midafternoon, the Dow was down a further 535 points (2%), the tech heavy Nasdaq was off 100 points (1.3%), and yet gold was up at $1,224.
Take a look at just how drastically the price of gold surged…
Investors sought shelter in treasuries as the 10-year yield dropped from 3.22% to 3.15%, while the DXY fell to just above 95, from above 95.7 early on Wednesday. It was a sight to behold, with gold closing solidly above $1,220 at $1,223.60 per ounce.
Not surprisingly, Friday (Oct. 12) brought some profit taking in both gold and gold stocks. By midday, gold prices fell to $1,218.
But gold’s response to the stock market sell-off is the encouraging sign we’ve been waiting for.
Here’s what that means for gold prices going forward, including my latest gold price prediction…
Gold Prices Are Trending Upward
First, let’s take a look at the DXY in more depth.
Despite the reversal at 95.5, I’m not convinced we’re out of the woods yet. Still, my sense is that the dollar will continue to weaken soon. Countering that right now, however, is the possibility of continued weakness in the euro, thanks to troubles in Italy and the Chinese yuan, which has just been devalued versus the U.S. dollar.
At least technically, the recent move lower in the DXY is being confirmed by both the relative strength index (RSI) and moving average convergence divergence (MACD) momentum indicators. A close below 93.5 would likely lead to further weakness, with 92.5 as the next lower target.
You can see how these indicators are beginning to trend down…
As for gold, we’ve cleared the first hurdle at $1,210, jumping well above the 50-day moving average. Last week, I said we have to watch for a close above $1,235, which will help confirm a new rally. Meanwhile, the RSI and MACD have a ways to go before becoming overbought.
Take a look at the momentum building in the gold chart below…
The VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) to gold ratio soared this past week, meaning gold stocks rose even faster than gold did. That’s another very encouraging sign for gold prices.
Take a look…
The GDX chart by itself shows outsized buying on Thursday (notice the big volume bar), pushing the GDX well above its 50-day moving average of $18.90. Plus, the momentum indicators have room to run before becoming overbought.
And finally, corroborating the GDX action is the gold miners’ bullish percent index BPGDM. This indicator has just moved up another notch from an ultralow level. This again suggests plenty of likely upside ahead for gold stocks.
Overall, it’s been a highly encouraging week for gold and gold stock investors. But we’re not out of the woods yet.
Renewed dollar strength could get in the way. A new gold price close solidly above $1,220 then higher at $1,235 will help cement this possible new rally.
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