Why the Dollar’s Strength Is Critical for the Price of Gold

The price of gold fell to test $1,300 last week, as gold investors scrutinized the latest U.S. Federal Reserve meeting. But it’s the dollar’s strength that will determine gold prices, and I’ll show you exactly why…

The FOMC meeting concluded Wednesday (May 2), and Fed watchers were left trying to decipher the Fed’s summary of its decision-making. Its statement introduced the word “symmetric” in an effort to balance interpretations that may seem too “hawkish.”

Yes, I know, we’re reduced to guessing what message the Fed’s trying to telegraph by parsing esoteric word choices.

But analysts seem to agree that the Fed is not anxious to get ahead of inflation.

Inflation has been running above 2% for several months, and that could become a major spark for gold prices.

So could a weakening dollar.

And that makes the next few months pivotal for gold prices. Here’s what moved gold prices last week, plus my gold price target for the end of summer…

The FOMC Meeting Sent Gold Traders Scrambling

It was a rough start to last week’s gold trading as the dollar extended its rally. The U.S. Dollar Index (DXY) rose from 91.5 to end Monday (April 30) at 91.85, pushing gold back to $1,315 as the markets began anticipating the outcome of the Fed’s meeting on Wednesday.

As the DXY climbed further on Tuesday (May 1) to 92.45, gold lost another $12, to close at $1,303. Despite their hit on Monday, gold stocks were unphased by Tuesday’s weakness and climbed.

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That continued again on Wednesday, the day of the FOMC meeting, even as gold climbed only $2.

It certainly gave the impression of a sign of exhaustion for gold stock sellers, suggesting that $1,300 may hold as support for gold. The Fed declined to raise rates, and despite a post-announcement dip, the dollar rose further, to 92.75.

You can see the dollar’s rough ride on Wednesday, as traders made sense of the Fed meeting…

By Thursday (May 3), the DXY was back around 92.5, and gold traders finally digested the Fed’s statement, factoring in the expected three more rate hikes this year. Gold prices rose on the day, ending at $1,312.

To end the trading week, the dollar rallied initially on news of the unemployment rate falling further, to 3.9%. Gold popped then dropped back, though ultimately climbed to end the week at $1,315, as the DXY retreated to 92.57.

While the dollar’s relationship to the price of gold is no secret, how the dollar’s strength moves over the coming months will be the key driver behind gold prices.

Here’s how I see it playing out, as well as my latest gold price prediction…

What the Dollar’s Strength Will Mean for Gold Prices in 2018

The dollar has been strengthening over the last two weeks. But current levels may be overhead resistance for the dollar, as 92.5 has been strong support through 2015 and 2016.

Take a look here…

But the dollar’s also looking overbought right now, as is often the case when it reaches above 70 (it’s currently at 74).

It’s crucial to watch what happens from here…

If the DXY heads back down, gold could rally dramatically.

While gold did have a challenging week, courtesy of the dollar, it managed to test its 200-day moving average and bounce back, as you can see here.

Plus, when you look at the gold-stocks-to-gold ratio, things start to get even more interesting…

Over the past week, even with gold dropping then bouncing back, the gold-stocks-to-gold ratio has actually established a new three-month high.

That means buyers of gold stocks stepped up in the face of soft gold prices.

And the VanEck Vectors Gold Miners ETF (NYSE Arca: GDX) is showing a strong upward trend to the $23 level.

If the dollar’s rally has peaked, then both gold and gold stocks are likely to be pushed markedly higher, and a gold price of $1,400 could happen much sooner than most expect.

Senior analyst for Bloomberg Intelligence Mike McGlone said recently that gold’s trading range has been especially narrow lately, and that the dollar’s run could be peaking.

Overall, in this kind of environment, it wouldn’t take much of a spark to set off a sudden rally in gold, taking most observers by surprise.

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