Gold prices slightly on Tuesday before slumping on Wednesday

Market report Michael Blumenroth – 04.10.2018

Weekly market report

This week’s market gold report comes a day early. Please note that all prices quoted are from early Thursday morning.

This week, the most precious of metals was briefly revived on Tuesday. It had quickly risen above the $1,200/ounce mark, was able to hold its ground until Wednesday morning, but then gave way again.

What were the reasons?

We saw a small sell-off on European stock exchanges and Italian government bond markets on Tuesday, as the Italian government rhetorically stepped up the budget conflict with the EU. This was initially caused by Lega politician Claudio Borghi, who chairs the Italian budget committee and explained that Italy could better manage its fiscal problems if it had its own currency. The Five Star Movement’s politician di Maio poured further oil into the fire, saying that Italy would not deviate a millimetre from the plans.

Return to safe havens

A side effect of this was that yields on US and German government bonds, considered safe, dropped, which tends to support the gold price. Secondly, Tuesday's demand for gold was most likely as a safe haven in the midst of the Italian budget drama weighing heavily on the markets.

Italy likely to concede to EU in budget proposal

There was some relaxation here on Wednesday evening. In the dispute over Italy's budget plans, the government in Rome seems to relent to its critics after all. As already announced, new debt will rise to 2.4 per cent of the GDP in the coming year, three times as high as planned by the previous government, as confirmed by Prime Minister Giuseppe Conte on Wednesday after a cabinet meeting. By 2020, however, the shortfall is to drop to 2.1 per cent, and by 2021 to 1.8 per cent.

Strong US dollar weighs down gold price

Also on Wednesday evening, US Federal Reserve head Powell said that the US could reach full employment by next year. This pushed the US dollar higher against virtually all other currencies. As a result, gold lost some of its Tuesday gains. In US dollar terms, gold traded at $1,182/ounce on Friday morning last week before climbing to $1,208/ounce on Tuesday afternoon. It was also traded here on Wednesday night before slipping back to 1,197 in the afternoon and evening as a result of the strong US dollar. Currently (Thursday morning) the most precious of all metals is traded at $1,198/ounce.

Gold in euro slightly rises

The euro was slightly lower against the US dollar throughout the week, which means that the gold price in euro gained a little more. The price of Xetra-Gold thus price rose from 32.70 €/gram last Friday morning to 33.55 €/gram on Tuesday afternoon following some rather lethargic days and currently also stands at 33.55 €/gram.

In addition to developments in Italy, the rise in yields/market interest rates on US government bonds to a seven-year high (ten-year) or even a ten-year high (two-year) could keep us busy in the next few days.

I wish all our readers a beautiful golden October weekend.

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