Significant gains for gold

Market report Michael Blumenroth – 27.03.2020

Wöchentlicher Marktbericht

The past week’s focus was of course on the spread of Covid-19, and in particular its impact on global health and the economies. It is likely to remain the dominating topic in the foreseeable future.

As the number of infected persons continues to rise globally, major central banks have announced further key interest rate reductions to alleviate the dire consequences expected for the global economy. A number of interest rate cuts have exceeded analysts’ expectations. More important, however, was the reaction of governments, among them Germany, which introduced fiscal policy measures of an unprecedented magnitude. In the US, Congress passed an economic stimulus package worth US$2 trillion. All this could, of course, be reflected in higher inflation rates in the long term.

The impact of the announced government bond purchases

The ECB decision on Wednesday evening to relax the criteria for the purchase of government bonds was not without effect on the gold price. The ECB will start to buy bonds with a maturity of less than one year; the scheme will also cover Greek sovereign bonds and authorise the ECB to hold more than one third of a country’s debt. This led to a sharp drop in yields/market interest rates on eurozone government bonds yesterday. Since fixed interest rates are in competition with the gold price, the latter was supported in its upward movement.

Decisive factor: US dollar liquidity

A very important factor for the near-explosive gold price rise at the beginning of the week: a number of investors had, apparently, sold gold positions for US dollars throughout the past two weeks. The past two weeks’ market movement was caused primarily by a lack of liquidity in US dollars. As the central banks are now making almost unlimited quantities of US dollars available, the short notice-shortage has essentially diminished. After the first market participants covered their selling positions, others were forced to buy into rising prices to limit their losses at almost any price, especially on the US futures markets. This led to exceptional price increases for gold futures contracts across the US exchanges, which overshadowed those in markets trading gold in the short term. In addition, we are seeing increasing reports on a short-term shortage of physical gold.

US dollar gold price

The gold price, which stood at 1,510 US$/ounce exactly a week ago, is significantly higher this morning. After it had retreated to around 1,500 US$/ounce at the end of last week and kicked off the current week at an even lower level, it started its upward journey in the early afternoon on Monday. This was due to the Fed’s announcement that it would, if necessary, purchase bonds for an almost unlimited period. The weekly highs were reached on Wednesday morning and Thursday afternoon at around 1,645 US$/ounce. Gold is currently trading slightly lower, at 1,622 US$/ounce – a respectable weekly gain after all.

Slightly slower rise for gold in euro

The euro recovered significantly over the course of the week, climbing around 4 cent, due to the above-mentioned fact that liquidity in US dollars was not as urgent an issue as during the previous week. The price of Xetra-Gold also rose significantly within regular trading hours, from 44.95 €/gram last Friday morning to 49.00 €/gram on Tuesday afternoon. Since then, due to the stronger euro, it traded slightly weaker at 47.25€/gram on Thursday morning and early today.

The markets will certainly remain volatile for the foreseeable future, and global monetary and fiscal easing measures might further support the gold prices.

I wish all readers a relaxing weekend. Stay safe.

 

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