Can someone stop pressing the repeat button?

Market report Michael Blumenroth – 02.12.2016

Weekly market report

Think big: I recently came across a TV report about a Tokyo jeweller. During the Christmas season, his shop entrance is adorned by a Christmas tree said to be made of pure gold. At two metres height, its weight of only 19 kilos however indicates that it must be extremely delicate. But still – wouldn’t we all want something that precious to grace our homes?

No matter what shape it comes in, gold saw another round of losses during the week now ending. As mentioned in the headline: since the election of Donald Trump as the next US president, I have been repeating myself and this week gold has again been heading south.

On the one hand, the US dollar is on the rise. The DXY index, which measures the strength of the US dollar against other currencies, has this week again climbed to a 14 year high. This means that gold, outside of the US currency area, is becoming more expensive due to the currency translation effect, even if the price of gold in US dollar is dropping. Two of the countries with major demand for gold, Turkey and India, yielded new record lows in their respective currencies. News of China’s effort to avert further outflow of capital with stricter gold import quota further intensified the situation and a number of major investors exited their gold investments.

The second problem for gold, being a non-interest bearing investment, are the continually rising bond returns, which especially in the US soared this week. Yesterday, ten-year US government bonds saw a return of 2.49 per cent, almost doubling since summer’s extremely low returns. This development is especially fuelled by expectations of significantly rising US national debt and rising inflation. 

Last Friday, gold traded at 1,190 US$/ounce and hit its weekly high on Monday morning at 1,197 US$/ounce, but then mimicked the previous week’s development and fell from 1,195 US$/ounce on Wednesday to 1,161 US$/ounce yesterday afternoon, its lowest price since February. Being an optimist, I would like to remark that the gold price has since somewhat recovered to its current price of 1,176 US$/ounce, and that since yesterday, the US dollar as well as government bond returns have been slightly weakening.

As opposed to the previous weeks, investors in the euro zone were not protected from the extreme price decline by a weaker euro. From 36 €/gram exactly a week ago and a weekly high of 36.15 €/gram on Monday, the price of Xetra-Gold fell to 35.25 €/gram yesterday afternoon. It currently stands somewhat firmer at 35.45 €/gram.

We are looking forward to an exciting week with Thursday’s ECB meeting. Will the government bond purchasing programme be extended? This afternoon, all eyes will be on the publication of US labour market data, which will, however, have no ground breaking impact on the markets. Much more important will be the outcome of the referendum in Italy on Sunday.

I wish all our readers a happy and relaxing second Advent weekend.  

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