A fine kettle of fish

Market report Michael Blumenroth – 16.12.2016

Weekly market report

Once again, it is not easy to find something positive to say about the gold market. Let’s put it this way: if your loved ones’ Christmas wish list includes gold jewellery, you’re in luck as prices have dropped. Following the Fed meeting, the precious metals, and especially gold and silver, faced a strong headwind throughout the week. Market participants had priced in an interest rate increase of 25 base points but remained unsettled as to what course the US central bank will follow in 2017. For the first time since September 2014, the Fed has not made downward but upward revision of its expectations for an interest rate hike in the near future. Instead of two increases of 25 base points each, the majority of FOMC members are now forecasting three interest rate increase for the upcoming year. In addition, Janet Jellen seems to have taken on an entirely new stance. In her press conference, she no longer stressed the downward risks but rather those of a strong US economy and job market, which traditionally precipitates higher inflation rates.

All of this caused a sharp rise both US returns as well as the US dollar. Within a few hours, the US dollar index DXY jumped 2.5 per cent to a new 13 year high, while the euro crashed to its lowest level since January 2003. An increasing number of market observers now expect an imminent attack on parity, with Asian currencies such as yuan and yen also depreciating significantly.
None of these developments were to the benefit of the gold price. 

While gold traded at around 1,170 US$/ounce a week ago and stood at 1,165 US$/ounce prior to the Fed meeting, its landslide started on Wednesday, reaching its lowest level since February at 1,123 US$/ounce yesterday afternoon. Last night, the precious metal somewhat recovered due to a slightly weaker US dollar and currently trades at 1,134 US$/ounce.

For investors in the euro zone, the price decline was weakened at least somewhat due to the weaker euro. From 35.45 €/gram last Friday morning, it tumbled downward and further accelerated its fall after the Fed meeting, to 34.70 €/gram – its weekly low – and currently trades somewhat more stable at 34.90 €/gram. 

Since US presidential election, the development of the gold price correlates with the development of interest returns and the US dollar, which will remain a fact in the near future. The current trends of rising returns or a further strengthening US dollar would have to slow down, come to a standstill or even turn around for the gold prices to recover in the long-term. We will have to wait and see whether we will see positions being closed out as we approach the end of the year.

To all of our readers, have a great fourth Advent weekend.  

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