This week, the financial markets have once again been dominated by the conflict in the Middle East. By and large, market participants are primarily focused on the development of oil prices. When they rise, risk aversion dominates; when they fall, cautious risk appetite returns to the markets.
Oil price shock at the beginning of the week causes anxiety
Early this week, market participants’ nerves were put to the test when oil prices rose by around 25 percent at the start of trading in Asia on Monday. They dropped significantly over the course of the day, and on Tuesday, hopes for a de-escalation of the Middle East crisis initially continued. Countless reports and rumors are making headlines and will likely cause rapid, short-term market movements. As things stand today, it is impossible to predict how long the conflict will remain at its current level of escalation. The rule of thumb on the markets is that the longer the Strait of Hormuz remains closed (the Strait is vital to the export of raw materials from the Middle East), the more serious the consequences for the global economy and inflation.
Rising bond yields and strong US dollar weigh down markets
Yesterday’s (Wednesday) developments illustrate the lack of progress in de-escalating the Middle East conflict, causing government bond yields around the world to rise sharply and the US dollar, in turn, to gain ground. Both factors once again weighed on gold prices, which had risen the day prior. They are currently reacting unusually, and perhaps somewhat counterintuitively, strengthening in riskier market environments but showing a tendency to weaken in risk-averse times.
Gold price between stability and short-term fluctuations
Gold traded at 5,165 US$ per ounce last Thursday morning but dropped to a weekly low of 5,015 on Monday night towards the start of trading, after oil prices rose by the aforementioned 25 per cent. With the decline in oil prices, gold gained traction and reached a weekly high of 5,238 US$ per ounce on Tuesday before slipping back below the 5,200 mark yesterday, due to rising yields and a stronger US dollar. At the time this report was written on Thursday morning, gold traded at 5,165, the same level as last week. Compared to other assets, gold has been much more stable this week.
Xetra-Gold benefits from weaker euro
The Xetra-Gold price benefited from the slightly weaker euro exchange rate, having dropped from 143.00 € per gram last Thursday morning to 140.50 intraday. By the end of the week, it had already regained 143.00. On Tuesday, Xetra-Gold traded at 144.50 before dropping to 143.00 yesterday at noon, apparently a magic level. This morning, gold kicked off trading at around 143.80 € per gram.
Outlook: Middle East conflict remains dominant, central banks come into focus
The situation in the Middle East remains a primary price determining factor. The coming week may see attention shift to the numerous upcoming central bank meetings and their response to the growing inflation risk.
I wish all readers a relaxing weekend and a break from the volatile markets.