The price of gold is now trading at an eight-month high.
Only one week ago, gold prices finally closed above $1,300 after multiple attempts to break through.
That has my gold recommendations rallying nicely too.
And we have an unlikely suspect to thank: the Fed.
A complete reversal by the U.S. Federal Reserve last week cemented the new bull in gold and gold stocks.
Not only did the Fed omit any indication about its next rate moves, a statement concerning the Fed’s balance sheet says it will now need to maintain a larger portfolio than originally planned.
Of course, stock market investors cheered this news. But gold traders absolutely loved it, sending the metal to $1,322.
With my Q1 target already met, my next gold prediction is looking even more likely.
Let’s break down what happened with gold prices last week and take a in-depth look at my next gold price target…
The Price of Gold Is in Bull Market Territory
Gold prices were already climbing early last week in anticipation of the Fed meeting outcome.
The precious metal rose steadily on Monday (Jan. 28) and Tuesday (Jan. 29), closing at $1,302 and then $1,311 respectively.
But of course, the really big move happened Wednesday (Jan. 30), as the Fed’s post-meeting statement was released.
Gold had been trending downward all morning from near $1,315 to bottom just below $1,310 by 2 p.m. Then it exploded higher within 45 minutes to $1,323 before settling the day at $1,319.
The DXY did nearly the exact opposite during that same time. Here’s what the last five days have looked like:
On Thursday (Jan. 31) and Friday (Feb. 1) gold spent both days in retreat mode, digesting its recent gains as traders took profits.
That pulled gold back to close at $1,318 on Thursday as the DXY bounced from a low of 95.19 to 95.55.
On Friday, the DXY remained near that same level, and gold backed off on news from the U.S. Labor Department that a robust 304,000 jobs were created in January. Gold ended the week at $1,317.
That’s perfectly positioning gold to hit my next target level…
Where Gold Prices Are Heading Now
By all accounts, the dollar has continued its bout of weakness.
Needless to say, the Fed’s silence on future rate hikes helps keep the outlook dovish.
I can see how the DXY might find temporary support near 95, which lines up well with the current 200-day moving average.
But the Fed’s about-face from where it was in December suggests the dollar’s going to face more weakness.
The DXY’s 50-day moving average continues trending downwards, so I continue to expect dollar weakness. However, we could see the index move temporarily sideways near its current level first.
Gold, on the other hand, has been on a spectacular tear.
It may even have been “too strong”. That’s not to say that this rally is not overdue.
It’s just that the jump from $1,280 to $1,325 was very quick. Notice that the relative strength index is now into overbought territory at 74.7.
I see one of two scenarios likely to play out from here.
Either gold consolidates around the $1,320 level, which was my latest target, or it drops back further but finds support at $1,300. I just want to caution readers not to be surprised either way.
Remember too that back in early January I said, “Overall, gold seems well positioned to reach for $1,300 in Q1.”
Well, we’ve met that target – and just in the first month of 2019. This bodes well for gold and for my $1,400 target by year’s end. I may even have to revise that higher.
Meanwhile, looking at the gold-stocks-to-gold ratio shows us a dramatic surge by the equities versus the metal, and that’s despite gold’s dramatic jump.
Here’s a look at my recent recommendations.
The DB Gold Double Long Exchange Traded Notes (NYSEArca: DGP) are down about 9.4%, but it’s only been three weeks. Gold’s bull is looking strong, so stay long DGP and/or buy on dips.
The VanEck Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) has participated nicely in the rise of gold stocks and is now up about 7% since mid-January. Continue to buy on dips.
To sum up, gold’s been on fire, and conditions look very favorable for the new bull to continue. But after such a strong January, February could bring consolidation.
— Peter Krauth
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Source: Money Morning