Gold prices consolidate

Once again, the past week has seen gold prices bravely defying capital market interest rates, some of which had risen to new three-year highs. On Tuesday, amid an increasingly dynamic upward movement in yields, Lael Brainard, Vice Chair-designate of the US Federal Reserve, who is usually a member of the rather cautious and expansive monetary policy camp, made an unusually clear plea for a tighter monetary policy. She called the task of reducing inflation pressures “paramount”, announcing the central bank will raise interest rates steadily while starting balance sheet reduction as soon as in May. The latter means that the Fed is expected to stop its monthly purchase of the equivalent of US$95 billion worth of maturing bonds. Since other buyers will have to step in for these bonds, liquidity will thus be withdrawn from the markets – resembling the effect of an interest rate hike. “Currently inflation is much too high and is subject to upside risks,” Brainard said. Many market observers now expect a 0.5 percentage point rate hike in early May.

Gold prices defy strong US dollar

As a result and in the US in particular, government bond yields rose sharply. Both two- and ten-year bonds yielded almost 2.60 and 2.67 per cent, respectively, the highest in more than three years. A side effect of the rise in US bond yields was that it also caused the US dollar to appreciate. Both the rise in capital market interest rates and a strong US dollar do not normally benefit the gold prices. In this environment, however, they saw a surprisingly stable and sound development throughout the week.

Demand for exchange-traded products in gold remains high. It seems that inflation concerns continue to hold the upper hand, prompting many investors to add a certain amount of gold to their portfolios.

Gold was traded at 1,932 US$ per ounce last Friday morning. Despite the turmoil across bond markets, the precious metal has been trading more or less sideways all week, between 1,945 (high on Tuesday afternoon) and 1,915 US$ per ounce (low on Wednesday morning). This morning, it traded slightly lower at 1,932.

Weak euro supports Xetra-Gold

The Xetra-Gold price benefited from the weak euro. While it stood at 56.20 € per gram at the end of last week, it rose to 57.10 yesterday afternoon and was expected to start trading this morning at around or above 57.10. Its weekly gain is due solely to the depreciation of the euro against the US dollar over the course of the week.

Next week’s calendar includes US consumer price data and an ECB meeting. I will be back at the end of the week after next.

I wish all readers a happy Holy Week and Easter.