Gold continues to suffer from stronger US dollar and rising returns

Market report Michael Blumenroth – 25.11.2016

Weekly market report

The past week has been a déjà vu, repeating the same patterns we saw a week earlier, with gold sales rising as the precious metal remained under pressure from two sides.

On the one hand, the US dollar has continued its upward trend. The DXY index, which measures the strength of the US dollar against several of other currencies, climbed to a new 14-year high a number of times and even did so yesterday in spite of the Thanksgiving holiday. This means that gold, for investors outside of the US currency area, is becoming more expensive, because it is traded against the US dollar on the global market. This is significant also for Indian investors – next to China, India has the largest global demand for physical gold. The Indian rupee fell to a new yearly low yesterday, which of course further drives the price for gold in the currency. The euro also fell, to its second-lowest level since March 2015, and Asian currencies in particular are currently experiencing massive losses against the US dollar.

The second factor negatively influencing the gold price continues to be bond returns, which continued to climb throughout the week, especially in the US. This week, two-year US government bonds had a return of 1.15 per cent and ten-year bonds were just under 2.4 per cent. This makes it tough to compete with for the zero-return investment product gold. In addition, expectations across the markets for a further interest rate hike of 25 basis points by the Fed on 14 December are now at 100 per cent.

All of this of course contributed negatively to the gold prices. The situation worsened on Wednesday, when the 1,200 US$/ounce mark broke down and major investors started selling their positions to limit their losses.

While gold traded at 1,207 US$/ounce exactly a week ago and remained at a stable 1,221 US$/ounce until Tuesday, its downward turn on Wednesday took it from 1,215 US$/ounce to 1,183 US$/ounce. The above mentioned increased selling activity started after the 1,200 US$/ounce mark was broken. After the US derivatives markets reopened last night (European time) and the returns of ten-year government bonds quickly climbed by five basis points, gold stumbled to its weekly low of 1,171.50 US$/ounce. On the brighter side, the gold price has since recovered to 1,190 US$/ounce – within an astonishing six hours.

As already seen last week, investors in the euro zone saw the price decline somewhat dampened by the weaker euro, but less so since last night’s euro resurgence. From 36.60 €/gram exactly a week ago, the price climbed to its weekly high at 36.85 €/gram on Tuesday. Following the losses experienced by the most precious of metals since Wednesday afternoon, the price of Xetra-Gold at the start of trading this morning fell to 36.00 €/gram – its weekly low – and currently trades only slightly stronger at 36.05 €/gram.

In the near future, the further development of the gold prices will remain heavily dependent upon the development of bond returns and the US dollar. The current trends would have to slow or turn around in order for the gold price to sustainably recover (a development still predicted by a number of analysts).

I wish all of our readers a relaxing first Advent weekend.

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