One swallow doesn't make a summer, as the saying goes, so we don't want to sound the all-clear here prematurely. Still, several market commentaries in recent days have suggested it may be time to start considering a possible trend reversal in gold prices.
Gold breaks free from oil and yield correlation
Somewhat overshadowed by the finally concluded soccer World Cup (a small fun fact: this year's tournament ran for 39 days, while the 2030 World Cup is currently set to span 44 days), gold appears to have decoupled from its strong correlation with oil prices and government bond yields. That correlation had seen gold prices suffer since the escalation in the Middle East, as rising oil prices fueled higher inflation and rate-hike expectations and pushed yields higher. After all, gold pays neither interest nor dividends, and the higher yield environment likely tempted many institutional investors in recent weeks to lock in those levels and unwind gold positions instead.
Middle East tensions trigger fresh oil price shock
Since the start of last week, tensions in the Middle East have flared up again. The Houthi rebels in Yemen also threatened to blockade the Bab al-Mandab Strait, which could bring shipping traffic through the Red Sea to a standstill. Following the closure of the Strait of Hormuz, Saudi Arabia has shipped much of its oil exports via the Red Sea. This would amount to another supply shock, and financial markets are pricing that in accordingly:
Short-dated Brent crude futures, which recently traded at US$72 per barrel, climbed above the US$95 per barrel mark on Wednesday afternoon for the first time in six weeks. As a result, interest rate futures markets are now pricing in two rate hikes of 0.25 percentage points each from both the Fed and the ECB. Government bond yields rose noticeably around the globe.
Gold regains its safe-haven appeal
Since early March, this had reliably put gold prices under pressure; that changed in recent days, presumably as investors sought gold as a "safe haven." Strong buying interest was recorded both among speculatively oriented investors on US futures exchanges and among ETC buyers.
Gold price movement over the week
Gold prices were trading at around US$4,030 per ounce on Thursday morning last week, then slipped to a weekly low of about US$3,960 per ounce on Friday before ending the week at US$4,020 per ounce. After a relatively uneventful Monday, the yellow metal apparently took a cue from Spain's bold soccer players and gained solid ground. As these lines are being written — this time on Wednesday afternoon for logistical reasons — gold briefly traded at US$4,163 per ounce and now stands at US$4,150 per ounce.
Xetra-Gold price tracks the move
The Xetra-Gold price moved largely in parallel, as the EUR/USD rate barely budged: during regular trading hours, it pulled back from €113.85 per gram last Thursday morning to around €111.45 per gram at its weekly low on Friday afternoon. After closing the week at €112.80 per gram, the Xetra-Gold price also advanced firmly, reaching €117.25 per gram just a few minutes ago. It is currently trading slightly lower, at €117.00 per gram.
Outlook: ECB and Fed in focus
Tomorrow, Thursday, the ECB is expected to leave interest rates unchanged. What will matter more is how it signals its stance on potential rate moves in the fall. The same applies to the central banks meeting next week, especially the US Federal Reserve on Wednesday evening — more on that next week. Developments in the Middle East are also likely to remain in focus, and the interesting question now is whether more investors will jump aboard gold's northbound train.
Amid the coming heat wave expected toward the end of next week, I wish all our readers a relaxing and well-deserved weekend.