Gold plagued by high yields but benefits from weak US dollar

Market report Michael Blumenroth – 02.02.2018

Weekly market report

Throughout the past week, the trends established at the beginning of the year have continued. Treasury bond yields went on to rise at a rate that seemed unstoppable. At 2.795 per cent, they climbed to their highest since April 2014, while two-year Treasuries’ yields reached their highest level in almost a decade at 2.17 per cent.

This was due, amongst other things, to the outcome of the last Fed meeting chaired by Janet Yellen. Members of the FOMC expressed their confidence in the US economic development and inflation rate, making a key interest rate hike by mid-March more than probable.

Weak dollar, strong yuan

As we have seen in the past, a rise in US Treasury bond yields is not to the benefit of the interest-bearing precious metal. However, an interest rate rise to the extent we are currently seeing in the US usually goes hand in hand with a strong US dollar. This year is different, for various reasons. The dollar is struggling and currently trades slightly below the 1.25 mark. More devastating was its decline against the Chinese yuan, which rose to its highest level since China’s shocking yuan devaluation measure in August 2015. China remains the country with the strongest demand for physical gold, which therefore depreciates in yuan. The currency effect is currently benefiting the gold prices. Still, compared to others, the gold market remained relatively calm, but the negative trend (higher returns) seemed to dominate. 

Gold price development in US dollar and euro

While gold traded at 1,355 US$/ounce exactly a week ago, it slumped in the days that followed and traded at 1,333 US$/ounce at its weekly low, which it hit on Wednesday right after publication of the Fed meeting outcome. Yesterday, the gold price slightly rebounded, especially in the afternoon, and traded at 1,351 US$/ounce for a short period. It has currently settled at 1.349 US$/ounce. 

Against the euro, the gold price has also seen a slight decline, partly due to the rise of the euro against the US dollar to the above mentioned 1.25 mark. From 35.00 €/gram last Friday, the price of Xetra-Gold continuously declined to 34.57 €/gram yesterday afternoon. Following a modest recovery, Xetra-Gold currently trades at 34.65 €/gram. 

What’s coming up?

US labour market data is set to be released this afternoon, and traders and analysts will turn their attention to average hourly wages which will sooner or later have an effect on inflation. The most interesting question remains whether the above described trends will continue.

I wish all our readers a great weekend. 

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