Bank of England spurs gold price

Market report Michael Blumenroth – 30.09.2022

Weekly Market Report

As has been the case time and again in recent weeks, gold faced fierce and icy headwinds at the beginning of this week. Things came to a head when a comprehensive tax relief package to be funded by new debt was introduced in the UK at the end of last week. Capital market interest rates, particularly in the UK, spiked to levels last seen 20 years ago. The yield on 30-year British government bonds rose 25 per cent within three days, to 5.12 per cent. Outside the UK, bond yields reached levels not seen for a long time. Ten-year US Treasuries intermittently yielded 4 per cent, their German counterparts 2.38 per cent. Prices dropped across the board or yields rose, for short as well as for long-dated government bonds. As stocks traded lower, the US dollar was in demand as a safe haven and the US dollar index rose to a 20-year high. Against the euro, the greenback traded at around 0.955, its highest level since 2002.

With yields on a record chase and an extremely firm US dollar, circumstances could not have been any worse for gold prices. They dropped to their lowest level in US dollars since the spring of 2020. Still, investors in gold in euro saw overall gains of around five per cent since the beginning of the year.

British bond buying programme aims to calm markets

To stabilise market sentiment and operations (and gold prices), the Bank of England announced on Wednesday noon its intention to buy unlimited amounts of long-dated British government bonds until 14 October. UK capital market interest rates reacted with a dramatic drop. Yields in the US and Eurozone also retreated, as a number of market participants expected other central banks might follow. In addition, the markets seemed somewhat oversold after the extreme volatility of the past few days. In the run-up to the end of the quarter today, positions were most likely also reduced or closed, and profits taken. Overall, expectations for a rapid recovery of market sentiment should be kept low. Bond markets in particular are likely to remain fragile, but for the moment, markets seem to have calmed down somewhat.

Gold in US dollars: two-and-a-half-year low on Wednesday

While gold traded at 1,672 US$ per ounce on Friday morning last week, it hit a two-and-a-half year low of around 1,615 on Wednesday morning. The Bank of England’s statement and the market movements it triggered caused the gold price to recover to 1,667. It traded around that level early this morning.

Xetra-Gold with slight weekly loss

The Xetra-Gold price was temporarily somewhat firmer due to the weaker euro, but then weakened alongside the European currency’s recovery. Last Friday, Xetra-Gold traded at 54.70 € per gram in the morning and at 54.10 in the afternoon. It rose to 55.35 on Wednesday afternoon. This morning, Xetra-Gold should start trading at around 54.50.

On the stock markets, the coming week will likely be dominated by the US labour market report, but the interest rate and bond markets will continue to set the tone.

I wish all readers a pleasant weekend.

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