Gold in euro rises to new annual highs

Market report Michael Blumenroth – 01.06.2018

Weekly market report

Most markets look back upon a turbulent week, especially for government bonds. Precious metals, on the other hand, are currently the epitome of calm.

The major issue throughout the week has been the Italian formation of government. After president Mattarella rejected the coalition partner’s proposed economy minister, the markets initially reacted favourably. On Monday, however, the realisation that this would lead to new elections sank in and the ensuing polls currently suggest that these would lead to increased votes for the far-right, anti-European Lega.

Developments in Italy dominate markets

Among a number of investors, this caused panic. Returns, i.e. current market interest of two-year Italian government bonds, which had been trading at negative yields as recently as mid-May, shot from 0.25 per cent to 2.63 per cent within two days, the largest yield increase of a two-year sovereign bond of a G7 country in 34 years. In other words, the market demanded higher interest to purchase Italian government bonds. After a formation of a government in Italy seemed to take shape and new elections were thought to be off the table, the situation calmed down. Currently, two-year Italian government bond yields stand at around 0.5 per cent. 

Uncertainty weights down the euro

Worries about the future of the eurozone also sent the euro packing. It dropped to a ten-month low against the US dollar and was also weak against other strong currencies such as the Swiss franc. The looming escalation in the trade conflict between the US and the EU, Canada and Mexico is also likely to cause concern. This afternoon, the Spanish government will have to deal with the scheduled vote of no confidence. Risk aversion is therefore the ruling sentiment across the markets.

Gold develops weaker than expected

In this environment, I would have expected a greater gold demand and a much better price development. Exactly a week ago, the precious metal traded at $1,304/ounce and reached its weekly high a few hours later on Friday afternoon at $1,307/ounce. By Tuesday afternoon, however, it had bottomed at $1,293/ounce and has been moving more or less sideways since, with a slight upward tendency. It currently trades at just below $1,300/ounce. 

Against the euro, gold reached its highest price in almost a year at €1,130/ounce, aided by the fact that the euro dropped to a ten-month low against the US dollar. 

In euro per gram, this means that the price of Xetra-Gold climbed from €35.83/gram last Friday morning to €36.45/gram last Tuesday. After the markets had calmed and the euro was able to rebound, Xetra-Gold settled at its current level of around €35.80/gram.

Uncertainty remains dominant

This afternoon, we will see the publication of US employment data. Throughout the next days, the gold price will most likely be dominated by topics such as the new Italian government and further escalations in the trade conflict. Market sentiment is therefore likely to remain nervous.

I wish all of our readers a calm and relaxing weekend.  

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