Gold under pressure after sharp rise in yields

Market report Michael Blumenroth – 08.11.2019

Weekly market report

The week has been marked by a sharp ascent in government bond yields and new all-time highs for the three leading US stock indices.

Compared to past weeks, market participants displayed an increased level of optimism about the economy from the beginning of the week. This sentiment was further fuelled by a slight improvement in some leading indicators – in particular the purchasing managers’ indices for services with surprisingly positive data from China, the US and some European countries.

Stock markets recover, safe havens weaken

Yesterday (Thursday) the markets picked up speed as Beijing that the US announced first steps towards lifting punitive tariffs. The news was met with perhaps exaggerated enthusiasm as investors have been starved for good news in the trade conflict.

The FX market saw the yuan making a bullish move, while the yen, as a safe haven, lost some of its appeal, as did gold. The market for bonds, also regarded as safe havens, saw a sharp price drop. Yields and market interest rates therefore rose significantly, and stock markets and cyclically sensitive commodities were in a similarly good mood.

Signs of relaxation in the trade dispute?

In the early evening, the US confirmed that an agreement had been reached in the trade dispute. A government representative indicated that both sides had consented to tone down tariffs as part of a first phase of a trade agreement. 90 minutes later, however, a further announcement slightly dampened the optimism: the planned agreement had met with some fierce internal resistance in the White House. External advisors had also stated their disapproval of a gradual withdrawal of special tariffs. There was disagreement within the government as to whether such a step would weaken the negotiating position of the US.

Nevertheless, the markets now appear to be much more confident about the global economy than a few days earlier. Stock prices and market interest rates are on the rise alongside a firmer US dollar and safe haven sales of yen, gold and silver.

Gold price declines more dramatically in US dollars than in euro 

Gold traded around 1,514 US$/ounce on Friday morning last week and climbed to its weekly high of 1,516 $/ounce on Friday afternoon. At the beginning of the week, it receded slightly with the downward movement accelerating on Tuesday and after a temporary slight recovery yesterday afternoon, reaching a weekly low of 1,461 $/ounce. Yesterday evening and this morning saw a slight recovery after the above mentioned doubts about the reduction of tariffs were raised. This morning, the precious metal rose to 1,473 $/ounce.

The euro traded somewhat weaker against the US dollar throughout the week. As a result, the weakness of the gold price was more dramatic in US dollars than for the cheaper euro, where it initially climbed from 43.60 €/gram last Friday morning to the weekly high of 43.65 €/gram, receding to 43.10 €/gram on Tuesday. After an intermediate recovery, Xetra-Gold fell to 42.65 €/gram yesterday but started trading this morning slightly higher, at 42.82 €/gram.

Progress in trading dispute remains crucial

The price of gold is likely to remain under the influence of the government bond and equity markets’ development. If risk appetite recedes, the gold price could benefit. If the US and China really do come to an agreement to abolish or reduce tariffs, gold is likely to remain under pressure.

I wish all readers a relaxing weekend – perhaps even at the precious metals fair “Edelmetallmesse” in Munich.

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