Gold on a rollercoaster

Market report Michael Blumenroth – 28.02.2020

Weekly market report

Market participants will remember the past week as both good and bad. As of now, it has been the worst week for the stock markets since the 2008 financial crisis – we’ll see how things develop until the close of trading tonight.

For gold, it has been a rather ambivalent week: On the one hand, we have seen new seven-year highs for the precious metal in US dollars and new all-time highs against the euro as well as a number of other currencies; on the other hand, it currently trades well below the highs reached on Monday.

Why did the gold price initially rise?

This is of course due to the global advance of the Coronavirus and ripple effects across markets. It stands to reason that gold, as a safe haven par excellence, was in demand throughout the week, especially as the stock markets, after the record hunt of the previous weeks, receded sharply this week and may now face the biggest weekly loss since 2008; we’ll know for certain tonight. Apart from gold, the yen and top-rated government bonds benefited from the flight into supposedly safe investments. Yields/market interest rates on ten-year US government bonds fell to record lows of 1.17 per cent, and on 30-year US government bonds to record lows of 1.68 per cent, a development which would have been unfathomable at the beginning of the year. At the same time, participants are relying increasingly on massive interest rate cuts by central banks around the world, especially by the Fed. At the beginning of the year, not a single Fed interest rate cut was expected for the entire year; this morning, expectations were three interest rate cuts at a nearly 90 per cent probability. In fact, at least three interest rate cuts are also expected for most other major industrialized countries. The lower the market interest rates, the more the interest-free gold price will of course benefit.

Why has the gold price receded amid volatile trading?

This is due to the fact that in times of panic trading, market participants tend to close out all positions in order to hold only cash, i.e. account balances. Gold investors have likely pocketed their profits. In addition, large positions in the stock and stock index futures markets plummeted, which can lead to margin calls. In order to raise the necessary funds, positions in the profit zone are sold, as has apparently been the case for gold. This is in line with the fact that new record positions had been built in the options and futures markets and on gold ETFs, which were most likely also sold.

US dollar gold slightly weaker week-on-week

After all the ups and downs, gold in US dollars stands roughly where it was last week. Last Friday, it traded around 1,635 US$/ounce mark. After the first Italian Coronavirus case over the weekend, the markets hit the panic button on Monday night, which benefitted the gold price, which jumped to a new seven-year high of 1,689 US$/ounce on Monday morning, but had receded to 1,650 US$/ounce by the evening (profit taking? margin calls?). Until this morning, the precious metal saw extreme volatility and hit a weekly low of 1,620 US$/ounce earlier today. Currently, gold trades at approximately 1,630 US$/ounce.

Euro Renaissance weighs down gold price

A number of positions in euro against US dollar were also closed and the euro gained traction day by day, rising to 1.1050 €/US$ this morning. This of course also had an impact on the euro gold price, which rose to an all-time high of 1,561 €/ounce on Monday, but traded at 1,476 €/ounce this morning due to the 2.5 per cent more expensive euro. 

Within regular trading hours, Xetra-Gold rose from 48.75 €/gram last Friday morning to 50.20 €/gram on Monday morning. Since then, however, it receded to 47.50 €/gram this morning. As mentioned, this was mainly due to the regained strength of the euro.

A forecast for any market over a longer period than one day is close to impossible. Generally speaking, the predominant market opinion is that gold will retain its safe haven appeal in the near future, especially if stock markets remain under pressure and the economic outlook, especially for the US, further deteriorates.

I wish all readers a restful weekend.

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