Gold on course to post fourth consecutive week of losses?

Market report Michael Blumenroth – 03.08.2018

Weekly market report

While in many federal states in Germany, the summer school holidays have only just begun, here in Hesse they already end today. So, the author of these lines was also on the road and thus fled from the heatwave, which seems to be particularly strong in Frankfurt.

Gold is generally less sensitive to heat. But somehow, the precious metal seems to be affected by the heat after all, having posted declines every week during my absence and with the current week also on course to be one of losses. However, this may change today afternoon, with US labour market data likely to move markets. 

US-dollar strength

In all earnest, there may be other reasons why gold weakened over the past three weeks: Firstly, ongoing trade conflicts are still threatening to impact global markets. The trade conflict between the US and China, in particular, put pressure on precious and basic metals. In addition to gold, silver, platinum, palladium, copper and other metals declined significantly. Furthermore, the US dollar strengthened against many other currencies. This tends to be as negative for gold as an increase in US yields – and the yields of 2-year and 10-year Treasuries have also moved up. Weak demand from institutional investors in the US and central banks as well as buyers of jewelry in Europe, India and Turkey also contributed to gold’s decline. At the same time, supply – for example from Canada – is increasing.

Gold demand in China

As one notable positive factor, demand from China (as a hedge against a weakening yuan) seems to be increasing. 

Three weeks ago, on Thursday, gold traded at 1,246 $/ounce. It has since declined, with a couple of brief periods of recovery in between. Gold weakened to 1,205.50 $/ounce last night, the lowest since mid-2017. At the time of my writing, gold traded at 1,207 $/ounce. 

The euro-US dollar rate has been stuck in a relatively tight trading span between 1.15 and 1.18 over the past weeks – or months, almost. As a result, gold has shown a similar performance when measured in euro. Posting a general decline, the lowest price was seen on the last day of July: Xetra-Gold moved from 34.35 €/gram on Thursday three weeks ago down to 33.35 €/gram on 31 July, before recovering to 33.80 €/gram. It is trading at 33.50 €/gram today.

Waiting for US data

The question right now is whether gold can defend the 1,200 $/ounce level. One crucial factor may be the development in US personal incomes – data on this will be released at 2:30 p.m. Frankfurt time – and whether, as a result, the US Fed will keep raising interest rates rather aggressively or take a break in 2019, at the latest.   

In the next couple of days, market participants are also likely to focus on the developing trade conflict between the US and China. 

I wish all of our readers a relaxing summer weekend – with easy access to a place in the shade, if you need it.  

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