Gold prices on a downward spiral thanks to US Federal Reserve

Market report Michael Blumenroth – 18.06.2021

Weekly Market Report

It was not a week that offered too much joy for the proponents of the precious metal. Having already crumbled a little at the beginning of the week, the gold price really went downhill since Wednesday evening.

Fed unexpectedly changes course

This was caused by the Fed, whose representatives had repeatedly taken a relaxed view with regard to the high inflation rates in recent weeks, pointing out that they were only this high for a short period of time. Moreover, the Fed was also focusing on the labour market, which remains far from its pre-pandemic level, making longer-term stimulus support necessary. After Wednesday’s meeting, however, there suddenly was a lot of talk about inflation and little about the labour market. The monetary watchdogs signalled a possible earlier phase-out of the currently very expansive monetary policy by suggesting that the first two interest rate hikes could take place as early as 2023. Seven of the 18 members of the Federal Open Market Committee even believe there is potential for the first interest rate hikes in 2022.

Strong market reaction

The markets were caught completely off guard and on the wrong foot by the Fed’s rather brazen announcement. In a first reaction, capital market interest rates rose significantly, especially in the short-term range. This resulted in the strongest upward movement of the US dollar within 24 hours since March 2020. As a result, commodities were hit hard across the board. Palladium fell by more than eleven per cent for some time yesterday, copper and the other industrial metals lost significantly, and gold and silver were also unable to withstand the downward pressure. Gold plunged from 1,900 US$ per ounce last Friday morning to 1,860 on Wednesday afternoon, before the Fed meeting. In the aftermath of the conference, a setback sent gold to 1,768 US$ per ounce yesterday afternoon. It has since failed to regain the 1,800 mark and is currently trading around 1,793.

Xetra-Gold also loses steam

The price of Xetra-Gold also dropped significantly, slightly dampened by the significantly weaker exchange rate of the euro against the US dollar. Within regular trading hours, it fell from 50.10 € per gram last Friday to a weekly low of 47.75 yesterday afternoon. It then recovered slightly and opened trading today at 48.30.

The markets will need a few more days to digest the “Fed shock”. In the short term, the US dollar could continue to sail with a strong tailwind, which is likely to make short-term recovery attempts in commodity prices more difficult.

I would like to wish all readers a relaxing weekend..

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