Headwind for gold

Market report Michael Blumenroth – 19.05.2023

Weekly Market Report

The gold price has held up for a remarkable period, but as the week progressed it has faced increasing headwinds. Over the past weeks, a likely motivation for gold purchases was investors’ wish for protection against possible setbacks on the stock markets, deemed possible as a result of the ongoing disputes between the US parties regarding the debt ceiling.

Progress in US debt ceiling talks?

According to US Treasury Secretary Janet Yellen, the US could face debt default in June if the debt limit is not increased soon. While the parties had been in a deadlock last week, the tone turned increasingly conciliatory as the week progressed. Yesterday, House Speaker Kevin McCarthy said that a deal might be struck as early as this weekend. In that case, gold would lose some of its safe haven lustre.

Focus on US bonds

Gold faced further headwinds from the bond markets, where yields on Treasury bonds rose significantly after several members of the US Federal Reserve considered an interest rate hike in June to be more likely than not. Regarded as wholly unlikely across the futures markets last week, it is now being priced in again with a probability of around 35 per cent. As a result, the yields on two-year Treasuries rose from 3.90 per cent last Friday to the current 4.25 per cent. Higher capital market interest rates in and of themselves have a dampening effect on the gold price. They have also led to a significant rise in the US dollar exchange rate. Both of these factors amped up the pressure on gold prices.

Gold falls below 2,000 US$ per ounce

Trading at 2,010 US$ per ounce last Friday morning, gold defended the 2,000 US$ mark until late Tuesday afternoon. It then came under heavy pressure for the above-mentioned reasons and dropped to a low of 1,952 US$ per ounce yesterday afternoon. This morning at 8:00, it traded slightly firmer at around 1,962.

The Xetra-Gold price held up somewhat better due to the weaker euro. From a low of 59.15 € per gram on Friday morning, it rose to a one-week high of 59.75 on Monday but dropped to 58.30 yesterday afternoon. It was expected to start trading this morning at around 58.60.

If a US debt ceiling deal is indeed reached in the coming days, the markets will likely turn their focus on economic data and central bank representatives’ statements, or the further development of capital market interest rates and the US dollar. Especially the US dollar once again seems to be in high demand.

I wish all readers a relaxing and sunny weekend.

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