Gold holds its ground despite strong US dollar and rising yields

Market report Michael Blumenroth – 28.10.2016

Weekly market report

I could barely have imagined the price of gold to trade even more sluggishly this week than in the previous week. But obviously I was mistaken.

That is not necessarily negative news, however, as the topic of the week is likely to be the rising yields of government bonds, which have caught many investors on the wrong foot. Whereas the yield of ten-year German federal government bonds was only -0.02% at the beginning of the week, it has currently surged to +0.18%. Short-term yields have rebounded as well. The US dollar was likewise able to gain ground against many other currencies, especially Asian currencies, over the course of the week. The DXY index calculated by Reuters, which measures the strength of the USD against a number of currencies, rose to its highest level since February of this year.

In normal conditions, all this would tend to have a detrimental impact on the price of gold. Nevertheless, gold prices managed to increase slightly over the course of the week, although oscillating within a rather narrow trading range. While gold traded at 1,265 US$/ounce at the same time on Friday of last week and hit a weekly low at 1,261 US$/ounce, it briefly climbed to 1,276.50 US$/ounce on Tuesday evening. Due to the headwind originating, as described above, from bond and foreign exchange markets, it was not able however to maintain this level and dropped back a bit to currently 1,269 $/ounce, which still represents a small weekly gain. Perhaps, the fact that inflationary expectations are gradually on the rise again are of relevance in this context.

The price of Xetra gold developed similarly, as the EUR/USD rate was virtually glued to the 1.09 mark. From 37.30 €/gram a week ago, which approximately represented the weekly low at the same time, the price advanced to a weekly high of 37.65 €/gram on Tuesday before losing almost all the small gains again and dropping to around 37.40 €/gram at present. Here as well, a small weekly gain has thus been achieved.

Over the coming days, a number of interesting data will be on the agenda. Today at 2:30 pm, we are awaiting the initial assessment of GDP in the US for Q3, with the respective forecasts being wide apart. Next week, the Federal Reserve Bank will hold a meeting, at which market observers will be expecting further indications of a possible interest rate hike in December. At the end of next week, the latest US labor market data are set to be published, and US elections will be drawing very close.

I wish all our readers a nice weekend, and hope that readers outside the federal state of Hesse will have a nice public holiday on either Monday or Tuesday. Don’t forget to set your clocks one hour back on Sunday morning.

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