Insecurity continues to rule the markets

Market report Michael Blumenroth – 29.06.2016

Weekly market report

Due to the fact that I will have no access to my computer and e-mails on Friday, this week’s market commentary comes two days early, as announced last Friday. I expect the situation will remain largely unchanged until the end of the week. The markets will continue to focus on the all-encompassing Brexit and its implications.

The initial panic seems to have quieted down somewhat. After the British pound and the global stock markets experienced heavy losses on Friday and Monday, the situation slightly rebounded yesterday. In line with British humour, it was when Iceland surprisingly defeated England in the European Championship that reality of the Brexit suddenly struck the country. Yesterday, the British pound as well as the global stock markets rebounded. Whether this recovery will be permanent remains to be seen, and we are still miles away from the price levels of last Thursday.

One thing is for sure: insecurity remains. We do not know who will be the next prime minister or whether there will be new elections. The future of Scotland and Ireland are unclear; both had voted to remain in the European Union. Nor do we know how relations between the EU and Great Britain will develop and new fears regarding the global economy and the upcoming US presidential elections are also looming.  

All of this is of course beneficial to gold. In addition, the markets are expecting a next Fed interest rate hike in the far future – in June 2018! The longer the Fed puts off an interest rate increase, the better it is for the gold price. In addition, an increasing number of government bonds are showing negative returns (as are currently ten-year German government bonds), causing investors in these supposedly safe investments to experience losses if held until the end of their term. During the past days, a number of commodity currencies also rose against the US dollar. All of this should indicate rising or at least stable gold prices. 

On the other hand, many of the above stated reasons are already priced in, and the buy positions of major investors on the futures exchanges currently trade at record levels. Still, a majority of market observers is expecting prices to rise, even though the summer months July and August have always been seasonally weak months for the most precious metal.

In last Friday’s turbulence, gold saw frantic buying activity in the morning and reached 1,358 US$/ounce. While I was writing my last commentary, it traded at 1,322 US$/ounce, which is also its current price after briefly falling to its weekly low of 1,306 US$/ounce yesterday due to a more risk-friendly mood on the stock markets. 

Xetra-Gold investors also benefit from the weaker euro which stood at 38.15 €/gram exactly one week ago and a weekly high of 39.00 €/gram on Monday, briefly falling to 38.00 €/gram yesterday. It slightly recovered this morning, to 38.45 €/gram – let us recall that it traded at 31.35 €/gram at the beginning of the year. It has been a convincing half-year for gold, hasn’t it? 

So let us wait and see how the markets will further digest the Brexit shock. On Monday, the US celebrates its Independence Day, which means that the markets will at least temporarily calm down. I will be back with my next commentary next week, on Friday as usual, hopefully full of happy anticipation for a Germany-Belgium European Championship final…

Until then, I wish you all happy and relaxing summer days. 

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