For a long time this week, the interest rate and currency markets rather bobbed along, after last Friday’s very strong US labour market report was followed by a short-term rise in capital market yields and the US dollar. At the beginning of this week, it was rather European government bond yields that continued to rise, while US markets were quieter.
Inflation rates higher than expected
Yesterday’s inflation data from the US was eagerly awaited. Although analysts’ expectations fell slightly over the course of the week, the forecast of 7.2 per cent was still the highest rate in 40 years. Somewhat shockingly for many market participants, the rate in January was even higher at 7.5 per cent, and the core rate, which excludes energy and food price changes, also rose by 0.5 percentage points from 5.5 in December to 6.0 per cent.
Rise in yields – gold prices on a short-term high
As a result, there were strong movements on the bond markets. Yields, i.e. capital market interest rates, increased significantly. Two-year US government bonds yielded 0.28 percentage points higher than on the previous day and the money markets are now pricing in three interest rate hikes, totalling one full percentage point for the next three meetings of the US Federal Reserve.
Normally such movements in yields are poison for gold prices. However, inflation expectations have risen somewhat more than yields themselves. Moreover, gold was in demand precisely because of its attributed function as an inflation hedge. In the course of the week, the precious metal was therefore able to gain, even though it retreated slightly from its high yesterday afternoon.
Gold settles at 1,826 US$ per ounce
Gold prices initially fell from 1,807 in the morning to 1,793 US$ per ounce last Friday right after the publication of the US labour market data that turned out to be better than expected. As the week progressed, they quickly moved back over the 1,800 mark and further, up to 1,836. After an initial move downwards immediately after the US consumer price data, the yellow metal initially climbed to 1,842 US$ per ounce yesterday, a two-week high. However, as the US dollar rebounded towards yesterday evening and over night as a result of further rises in US capital market interest rates, gold prices came under pressure and weakened to 1,826 US$ per ounce this morning.
The Xetra-Gold price also increased slightly week on week. While Xetra-Gold was trading at 50.70 € per gram at the end of the previous week, it rose to 51.80 yesterday afternoon. At the start of trading today, Xetra-Gold should trade at 51.60 € per gram.
How will the central banks react?
The focus of interest on the markets in the coming days should continue to be on the presumed reactions of the central banks on the surprisingly persistent high inflation rates. Further movements on the interest rate and currency markets could also influence the gold price.
I wish all readers a pleasant weekend.