New highs in US dollar and US returns pressure gold below 1,300 $/ounce mark

Market report Michael Blumenroth – 18.05.2018

Weekly market report

As during the previous weeks, the gold price this week again faced heavy headwind. Returns/market interest of ten-year US Treasury bonds finally crossed the 3 per cent mark and hit 3.12 per cent this morning, a level last reached seven years ago. Returns of two-year US Treasuries even climbed to a ten-year high. This might tempt a number of major investors to shift their attention from non-interest-bearing investments to US government bonds. Among the G10 countries, there is currently none offering higher interest on government bonds than the US.

This rise in market interest in the US had a dampening effect on the gold price, as did the continuing uptrend of the US dollar to new annual highs against nearly every other currency. This caused the gold price outside of the US to rise and is in turn likely to weigh down demand. 

Will demand for gold rise in countries with weak currencies?

It will be interesting to see whether countries with extremely weak currencies against the US dollar, such as Argentina or Turkey, will show a higher demand for gold. As a rule, and similar to the US currency, gold holds the promise of a certain protection against the decline of the home currency. During the first quarter, at least, we saw strong purchasing activity of the central banks of Russia and Turkey. 

The development of the gold price in US dollar and euro

The gold price is thus under pressure, due to both the higher interest rates in the US and the firmer US dollar. On Friday morning last week, Gold traded at 1,320 $/ounce and at 1,326 $/ounce by Friday afternoon. After the US dollar had reprised its rally across the FX markets, gold dropped below the mark of 1,300 $/ounce for the first time this year on Tuesday. The weekly low was reached yesterday afternoon at 1,285.50 $/ounce. At currently 1,290 $/ounce, it remains below the mark of 1,300 $/ounce. 

Against the euro, the gold price therefore also dropped, even though it had reached new annual highs just last week. The decline was, however, cushioned in part by a weak euro. From 35.60 €/gram last Friday and 35.70 €/gram at a daily high, the gold price set back to 35.05 €/gram yesterday morning. It currently stands at 35.10 €/gram. 

No fundamental change in sight

During the next days, the development of the gold price will most likely remain linked to the development of the US dollar and returns, as well as possibly the US-Chinese trade conflict. The formation of a new Italian government will likely limit the price potential of the euro.   

I wish all our readers a relaxing Pentecost weekend.

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