Declining gold prices in spite of stock market turbulence

Market report Michael Bölumenroth – 09.02.2018

Weekly market report

The past week will not be remembered fondly by shareholders. Following last Friday’s publication of US labour market data, including data on the highest average salary increase in the US since the financial crisis, the ISM index showed that economic activity in the non-manufacturing sector has also been on the rise; data was far above analysts’ expectations. This caused rising Treasury bond yields (market interest) around the globe. US Treasuries reached their four-year high on both Monday and Thursday at 2.88 per cent. Yesterday, the Bank of England caused additional concern by announcing a tighter policy concerning future interest rate hikes.

Stock markets plummet but gold fails to pick up speed

What followed was panic among investors across the stock markets. The Dow Jones Index dropped by more than ten per cent after it had just reached new all-time highs in late January. Similarly, the S&P500, the Nasdaq and the European stock indices dropped significantly, while safe havens such as the Swiss franc and Yen were in demand. It is quite remarkable that the gold price was unable to gain momentum from the stock markets’ turbulences. 

This is due to a number of reasons. The global fear of rising interest rates is harmful to the precious metal as a non-interest bearing investment. Also, the US dollar gained considerable ground during the course of the week, especially against the currencies of gold producing countries, as well as against the Chinese Yuan – China being the country with the highest gold demand worldwide. And finally, when turbulences on the stock markets start, major investors tend to close their positions across the markets, regardless of the consequences. This was impressively demonstrated to us in 2008, when the gold price initially dropped before taking an upward turn.

Gold somewhat stronger in euro

A week ago, gold traded at 1,349 US$/ounce. It was able to hold its ground until Tuesday morning, probably due to a still powerful safe haven effect, when it traded at a slightly lower 1,345 US$/ounce. However, the downward spiral set in shortly after and continued until yesterday afternoon to 1,307.50 US$/ounce. Last night, following the New York exchanges’ turbulences, the gold price rose to 1,322 US$/ounce, settling in slightly below that and currently trading at 1,315 US$/ounce. 

We have seen a similar development in euro, although the US dollar, which dropped to 1.22, somewhat cushioned the fall. From 34.65 €/gram last Friday, Xetra-Gold first rose to 34.90 €/gram on Tuesday before falling to 34.40 €/gram. Currently, Xetra-Gold trades at 34.45 €/gram. 

Market observers will certainly keep an eye on the interest rate markets, which makes it difficult to predict a lasting trend for the gold prices. To take our minds of things, we should maybe just enjoy the carnival season. That said, I wish all our readers a happy weekend. 

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