The gold price correction we’re witnessing has investors wondering if the precious metal is still relevant in today’s world.
It’s little wonder, with the metal recently marking its largest weekly drop in over a year, and closing at its lowest price in over a year and a half.
Since April, its seems gold prices only know one direction: down.
The Turkey currency crisis sparked fears of contagion and of spreading to other emerging markets, pushing the U.S. Dollar index to a 14-month high.
Of course, that has the bears mauling and normally steadfast gold owners now shivering in doubt, as gold has given back 11% so far this year.
It’s totally possible that gold has lower to go before finding its final bottom.
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But the gold sell-off has potentially washed away nearly all the weak hands, setting the stage for, if nothing else, a healthy relief rally.
Why Gold Prices Fell to a 2018 Low
Early in the week, it became clearer that gold wasn’t turning into the safe haven asset we all thought it would.
It opened on Monday (Aug. 13) at $1,205 and by the close had fallen decidedly below the psychological threshold of $1,200 to $1,193.
With momentum decidedly on the dollar’s side, the U.S. Dollar Index (DXY) rallied on concerns about Turkey as investors sought shelter in America’s currency. By Wednesday (Aug. 15), the dollar index had momentarily flirted with 97, a level it hasn’t seen since June last year.
Here’s what the dollar index has done over the past trading week…
By late Wednesday, as gold was trading in Hong Kong, the priced momentarily dipped all the way to near $1,160 before rapidly recovering to $1,173. That $1,160 has marked the lowest point so far in this correction.
The dollar then started losing some momentum from its Wednesday peak. It managed to hold around 96.6 for most of Thursday (Aug. 16), but then waned as stocks powered higher on the prospects of U.S.–China trade talks.
As the week ended, the dollar index softened even further, touching as low as 96.10. That helped gold rally from its early morning lows around $1,174 to reach $1,182 by late afternoon on Friday (Aug. 17).
But there is a silver lining to the gold price correction.
Once the weak money is flushed out of the gold market, there will be a stronger base to fuel a new gold bull market.
My gold price forecast outlines how that will happen…
Where the Price of Gold Is Heading Next
The dollar’s rise appears almost exclusively responsible for gold’s woes.
Take a look at the DXY over the last two years, and you can see the dollar abruptly begin a turnaround this spring, just as gold prices began their slide.
But the big jump in the DXY this week was a reaction to Turkey’s currency crisis and concerns over contagion. It’s very possible that we’ll see those concerns diminish in the near term. The dollar’s retreat on Thursday and Friday suggests that could be the case.
The sudden rally in the DXY pushed it toward overbought conditions. That could continue for a while, but the relative strength index (RSI) is now above 70, and the DXY is extended above its 50-day moving average.
That’s pushed gold to bottom-barrel prices. No matter how you cut it, this is a dismal-looking chart for gold.
We need to go all the way back to January 2017 to see gold around the $1,180 level, which may actually provide support. If not, gold’s next target lower would be around $1,130.
As for gold stocks – well, this is what capitulation tends to look like.
The VanEck Vectors Gold Miners ETF (NYSE Arca: GDX) suffered a 13% drop in just eight days by Thursday’s low and a 20% drop since July 10. That pushed the RSI down to a dramatically low 11 on Aug. 16 before a decent bounce back on Friday, along with gold.
At this point, I think we could get a decent relief rally in gold prices, possibly taking them to $1,220 or even $1,230.
Gold will bounce back in U.S. dollars, and indeed, it may have just started to.
As for gold’s relevance, it’s easy to start questioning it when sentiment is this bad thanks to a parabolic sell-off. But here’s some food for thought.
Both Turkey and to some extent Iran have been dealing with severe currency crises recently. Their currencies have been devastated by inflation.
Anyone in those countries who owned a decent amount of gold has seen a portion of their wealth protected. Some have sold gold at dramatically higher prices, allowing them to buy food and other necessities of daily life, without selling the furniture.
That’s why you simply can’t afford to risk your financial security if these crises spread to the United States…
Your Financial Future Is at Stake (Are You Prepared?)
If you’re like most Americans, you’ve felt a sense of market turmoil ahead. We could be in for another white-knuckle ride… a “Great Reckoning,” if you will.
The vast majority of folks don’t see this coming, and those few who do are not preparing properly… nor profitably.
So ask yourself, right now: Are you where you want to be financially?
If the answer is yes, that’s great.
If the answer is no, then understand that you are not alone – and you need to click here now…
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