One of my favorite quotes from the business world is attributed to James Carville, then adviser to US President Bill Clinton, and dates back to the early 1990s. I have certainly cited it a hundred times, but not yet in this space. So here goes. Roughly translated, it reads: "I used to think that if there were reincarnation, I would like to come back as president, pope, or a baseball player. Now I would like to come back as the bond market. The bond market can intimidate everybody."
Government bonds: influence over policy
The background was the Clinton administration's realization that financial markets, especially the government bond market, can exert considerable influence on economic policy. When investors fear larger budget deficits or unsound fiscal policy, they demand higher yields on government bonds. This raises financing costs for the government and often for the entire economy as well. A prominent example of Carville's thesis was the resignation of British Prime Minister Liz Truss in October 2022, which the bond markets all but "forced."
French bonds under pressure
Why am I telling you all this here? The reason is that the bond markets are clearly setting the direction for other market segments at the moment. The focus remains in particular on French government bonds, whose yields rose sharply last Thursday and Friday. After a temporary calming at the start of the week, pressure on French government bonds, and in their wake on Italian and Greek ones, increased again. Yields on long-dated US government bonds also again traded at 24-year highs.
Rising yields weigh on gold
Long story short: As explained last week, rising government bond yields generally mean headwinds for gold prices. In addition, the euro came under increasing depreciation pressure and fell to a 17-month low against the US dollar.
Please keep in mind from here on that I am only the messenger: Gold prices did show brief recoveries now and then, not least because the yellow metal is considered a "safe haven" in turbulent market environments. By and large, however, the pressure from bond yields and US dollar strength was greater, so that quotations edged down moderately over the course of the week.
Gold price: ups and downs over the week
Last Thursday morning, gold prices were still trading at around $4,160 per ounce. After a rise to $4,225 per ounce on Friday, the headwinds strengthened, and gold quotations headed into the weekend at about $4,140 per ounce. After some ups and downs within a relatively narrow trading range, prices moved further down yesterday and depreciated as far as $4,067 per ounce. Quotations did recover somewhat yesterday evening and this morning. Gold is currently trading at $4,125 per ounce.
Weaker euro cushions price decline
Because of the weaker euro against the US dollar, the Xetra-Gold price is only slightly below the previous week's level. During regular trading hours, it initially rose from €118.4 per gram last Thursday morning to about €120.75 per gram on Friday. After holding around the €118.5 per gram level for a while, it moved lower yesterday to the week's low so far of €117.1 per gram, and currently stands at €118.2 per gram.
Outlook: bond markets set the tone
The bond markets remain in focus. A calming of the bond markets is likely the most important prerequisite for gold prices to head north again on a sustained basis. Should the strong fluctuations in the bond markets continue, however, gold could possibly regain its status as a "safe haven." Over the medium term, many fundamental factors argue for higher prices, but in the short term the pressure could initially persist.
I wish all readers a pleasant weekend.