Gold stuck between rising bond returns and a weakening US dollar

Market report Michael Blumenroth – 29.06.2017

Weekly market report

Just like last week, my commentary comes a day early – next week, I will be back on schedule, which means you will find the report on Friday morning as usual.

The trading week kicked off with some commotion on the gold market, with the gold price slumping by nearly US$20 without apparent reason. Market commentators later reported that one trader had mistakenly placed a “fat finger” sell order on Comex. More than 50 tons of the precious metal were traded within just one minute, and during the course of the day, the gold price rebounded somewhat.

While currencies and government bonds remained mostly stagnant on Monday, Tuesday morning started with a bang, shaking market participants wide awake when ECB president Mario Draghi hinted at the ECB’s readiness to shift its monetary policy into line with the improving economy. The financial markets reacted strongly. Draghi indicated that the ECB will have to be prudent to gradually adjust its monetary stimulus and the currently weaker inflation is only temporary. He further stated that inflation will sooner or later react to the higher growth rates. These effects, however, are on the whole temporary and should not cause inflation to deviate from its trend over the medium term, so long as monetary policy continues to maintain the solid anchoring of inflation expectations. He also stated that the factors weighing on inflation are mainly temporary factors that typically the bank can look through.

All of this is in stark contrast to his statements following the ECB meeting three weeks ago. The euro rose to a 12-month high against the US dollar (even though ECB representatives tried to put Draghi’s statements into perspective). Investors are expecting that the ECB, bank of England and Bank of Canada will all lean towards an interest rate increase, while the markets are in agreement that the US is already nearing the end of this path. Accordingly, the US dollar took a significant fall on Tuesday and Wednesday, while government bond yields rose significantly compared to the beginning of the week.

As a rule, the currency effect helps the gold price while the yield effect harms; both effects occurring simultaneously mean neutralisation. The gold price fell from 1,253 US$/ounce last Thursday to 1,236.50 US$/ounce on Monday morning when the fat finger trade occurred. It rebounded to 1,255 US$/ounce on Wednesday and currently trades at 1,252 US$/ounce, i.e. almost the same as last Thursday.

Against the stronger euro, gold weakened. Xetra-Gold dropped from 36.10 €/gram last Thursday to a weekly low of 35.30 €/gram on Wednesday afternoon and currently trades slightly higher at 35.40 €/gram.

Coming up: the end of the half-year, and the US is celebrating the 4th of July on Tuesday. The markets will most likely remain focused on the central banks’ monetary policies.

I wish all our readers a calm and relaxing weekend. 

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