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posted on 23 February 2016

Why The Gold Price Rally Will Continue In 2016

by Peter Krauth, Money Morning

Special Article from Money Morning

After a steep climb over the past two weeks, the gold price is down 0.25% today (Friday) in afternoon trading. And while gold prices may head lower in the short term, we are still very bullish on the gold spot price for the rest of 2016.

First, here's why the gold price was down Friday.

U.S. stock markets have rebounded this week, causing fewer investors to focus on precious metals. Since last Thursday, the Dow Jones Industrial Average has climbed 2.7%. For now, investors aren't piling into safe-haven assets like they were earlier this month.

Those types of market fluctuations are completely natural. Gold bull markets are never a straight line up, but rather two steps forward then one step back.

If the gold bull has in fact returned, we're likely in the first phase of the "one step back," which should set the stage for the next surge forward. And that's a great opportunity for gold investors...

How the Gold Price Has Trended Last Week

Last week, the gold price finished up near its recent high at $1,238.

But by Tuesday, Feb. 16, gold prices fell to a closing price of $1,200.

On Wednesday, gold opened around $1,206 and climbed only slightly to end NY trading at $1,208.

When the S&P 500 fell 0.5% Thursday, gold had risen from $1,205 at its open to spike upwards to $1,233 by close.

Now, here's what will be moving the gold price in the coming weeks and months...

What's Next for Gold Prices in 2016

The 7.1% gold price rally last week was the biggest weekly gain since 2008. Gold prices are now up 13% since the start of this year.

gold price

In fact, the move is also remarkable because gold did something else it hasn't done in five years; it set a higher high. (Note that I've marked lower highs in red, and the recent breakout higher high in green.)

That's bullish technical action that means there was considerable buying momentum behind the recent move, something that's confirmed by a strong volume reading.

We also see that the 50-day moving average has turned up and the 200-day moving average appears to be flattening, both encouraging signs.

I've mentioned that very recent gains in stocks and oil made gold temporarily less attractive. But the U.S. Dollar Index has also bounced a bit higher from its recent lows.

gold2 (1)

Of course a stronger dollar weighs on gold, so that's likely been another contributor to the gold weakness of the last few days. I think the dollar will keep heading lower longer term, but until then it could be a headwind for the gold price.

Looking at the bigger picture, we've just witnessed a strong move higher in gold. In the nearer term, I think we could see gold retrace some of its recent gains. But like I said earlier, I'd expect gold to follow a pattern of two steps forward, one step back.

In this case, gold could well come down to test either the previous high around $1,180, or maybe even its 200-day moving average, before returning on its path to higher levels.

But the dramatic surge of the last two months could well be the strongest signal yet that the gold bull is stampeding back.

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