Why the Biggest Weight on Gold Prices Could Be Its Next Catalyst

Last week I made the case for gold prices finally finding their bottom, but the market would have nothing of it.

The pain wasn’t over, as the resource space as a whole took a hit while the dollar rallied once again. But what’s hurt the price of gold over the last few weeks could be its next catalyst…

In the last five trading days, the U.S. Dollar Index (DXY) rose by over 140 basis points, beating back on resource prices. If anyone thinks volatility is dead, I suggest they have a look at currency markets.

gold bars

Worries about an inverting yield curve has some investors reaching for cash and short-term bonds.

But while a surging dollar is putting downward pressure on gold prices, gold will get a boost when the dollar falls back to earth.

It’s tough to say when the dollar will top out and boost gold prices, but gold stocks still continue to portend that a gold rally could be in the cards.

The trading range for gold stocks has been getting ever narrower, suggesting a breakout is closing in.

Let’s delve deeper to see which way it could go…

How Gold Prices Broke Through Their Bottom Last Week

Gold had a lousy week that saw the yellow metal do an almost perfectly symmetrical round trip.

After peaking on Monday (July 9) just as New York trading was about to take over, gold would start to slide back once again.

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The culprits were negative sentiment and a renewed dollar rally. This time, the DXY would start out on Monday morning at 93.75 and establish a new weekly high each day the rest of the week.

That trough-to-peak rally of 140 basis points would take the DXY from 93.75 early on Monday all the way to 95.22 early on Friday (July 13). This four-day gain was an astounding 1.5% for a broad index of the world’s most widely held currency.

Here’s how that looked…dxy at 94.70

By Friday morning as the DXY peaked around 95.22, gold prices had dropped down to retest the intraday low of $1,237, just as they did on July 2. At midday, gold had inched back to $1,242 with the DXY off at 94.83. As the end of the trading week neared, the DXY was back down to 94.7 while gold was holding $1,240.

But while the DXY held gold prices down, there might be some light at the end of the tunnel.

Here’s what that means for my latest gold price forecast…

Where Gold Prices Are Heading Now

Despite the revival in the dollar since mid-April, the DXY has so far been unable to break above overhead resistance at 95.5. ice graph open 94.49

And as I highlighted last week, the relative strength index and moving average convergence/divergence continue to trend downwards, suggesting weakness ahead may be likely.  We may also just have seen the right shoulder be formed in a bearish head-and-shoulders pattern. We’ll need a little more time to see if things play out this way.

Meanwhile, gold may be forming a double bottom…cme graph open at 1242.30

If the dollar does in fact work its way lower from here, then we could see gold bounce back.  Since peaking at $1,360 in April, gold’s down about 8.8%, which is still less than the 10% considered by many an unofficial “correction.”

Looking at gold stocks and gold junior stocks through the VanEck Vectors Gold Miners ETF (NYSE Arca: GDX) and the VanEck Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) respectively, we see in both cases an ever-narrowing wedge that suggests a break lower or higher is getting close.

Take a look at how the GDX is narrowing…GDX OPEN AT 22

And you can see an identical trend in the GDXJ…gdxj graph open at 32.50

Both of these are trading very tightly along with their 50-day and 200-day moving averages.

What we need to remember is that gold stocks have a habit of bottoming in the middle of the summer. I’ve highlighted in yellow those events as they took place last year. While there is no guarantee, looking for this behavior to repeat could pay off.

I still think gold could rally back over $1,300 by end of summer, with $1,400 in its sights before next year.

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