Whether it’s the unusually high temperatures, spring fatigue, exhaustion among traders who burned out at the Metallica concerts in Frankfurt over Pentecost, or market participants’ end-of-month positioning – gold prices lacked luster and failed to pick up steam this week. They weakened despite both oil prices and government bond yields shifting into reverse at the end of last week and following the long weekend across the US, UK, and Germany. This scenario would normally have supported gold in the current environment.
Stock market records and interest rate policy are dampening demand for gold
In my view, there are two possible explanations: First, the new record highs reached almost daily by US stock indices are likely motivating major investors to favor stocks (and stock indices) over gold. Secondly, several central banks in Asia have recently caught the markets off guard with unexpectedly sharp interest rate hikes. Representatives of the ECB, the Fed, and the Bank of Japan have also signaled a more restrictive monetary policy going forward, which in most cases should result in higher key interest rates.
Headwinds in the form of rising interest rates and strong US dollar
This environment of increasing key interest rates around the globe is weighing on gold prices, at least in the short term, as it is quite contrary to the scenario most market participants had anticipated through the end of February. This is reflected in the precious metal’s recent, rather lackluster performance, additionally weighed down by the stronger US dollar.
Gold price trend: from recovery to sharp decline
While gold stood at around 4,530 US$ per ounce last Thursday morning and closed the week at an only slightly lower 4,510, it recovered at the start of trading on Tuesday to a weekly high of 4,580. Gold has since, however, been trending downward, with a weekly low (thus far) this morning, down from 4,450 to 4,367 US$ per ounce. At the time of writing this report, gold was trading at a slightly higher 4,380.
Xetra-Gold down despite weaker euro
Unsurprisingly, the Xetra-Gold price was also down, somewhat buffered by the weaker exchange rate of the euro against the US dollar, initially up from 125.25 € per gram last Thursday morning to 126.35 at the start of the week. The trend then reversed, with prices dropping to 121.60 yesterday, Wednesday. Xetra-Gold was expected to start trading today at a slightly lower 121.35 € per gram.
Geopolitical risks continue to dominate market activity
The situation in the Middle East remains the most important issue for the markets. With the start of the new month on Monday, we may see gold once again attract greater attention. In addition, various US economic data are scheduled for release next week.
I wish all readers a pleasant end to the month of May.