Record chase resumes

Last week, we reported that the gold price had narrowly missed the US$3,800 per ounce mark, which was no longer an insurmountable hurdle at the beginning of this week. In fact, gold traded just shy of 3,900 US$ per ounce yesterday.

The recent sustained gold rally is due to several factors. The week started out with the rising likelihood of several US government agencies’ shutdown at midnight US Eastern Time yesterday, i.e. their indefinite closure. After the deadline for a transitional budget had expired, US government operations have indeed effectively come to a partial standstill because Congress Republicans and Democrats failed to agree on bridge financing. In the past, the economic impact has usually been manageable, but the shutdowns have nevertheless had a dampening effect on economic growth, depending on their duration, especially as government employees who have been temporarily laid off are likely to spend cautiously for the time being.

US shutdown and labour market fuel gold prices

Weaker economic growth could, in turn, have an impact on the labour market. The shutdown will most likely mean that the official labour market data, which was due to be published this Friday, will not see the light of day until after the shutdown has ended. Data published yesterday by employment services provider ADP indicates that jobs were lost in the private sector in both August and September. As a result, the interest rate futures markets are now factoring in another Fed interest rate cut at the end of October, causing US government bond yields to fall. The US dollar also faced moderate headwinds. Various factors thus drove gold prices.

New record high for gold in US dollars and Xetra-Gold

While gold traded at 3,740 US$ per ounce last Thursday morning and at 3,722 over the course of the day, it rose slightly on Friday and then took off on Monday from the start of trading. The 3,800 US$ per ounce mark was cleared on Monday night, and the rise continued unabatedly, initially reaching 3,870 on Tuesday. Profit-taking followed on Tuesday, with the gold price dropping two per cent below the 3,800 mark, which attracted bargain hunters. Strong buying activity brought gold to a new record high of around 3,895 yesterday morning before somewhat running out of steam. The precious metal started today’s trading at around 3.870 US$ per ounce.

Despite a slightly stronger euro over the course of the week, the Xetra-Gold price also reached a new record high, rising from 102.40 € per gram last Thursday morning to unprecedented heights of around 106.70 yesterday afternoon, despite a small setback on Tuesday, closing the trading day at 106.00. If the 7:00 price holds, Xetra-Gold is likely to start trading this morning at around or just below 106.00 € per gram, within sight of its record high.

Gold continues to rise

Investors should not ignore the fact that the upward movement in gold prices over the past five weeks has been exceptionally dynamic. Profit-taking, as seen this past Tuesday, could therefore happen again at any time. In the medium term, ongoing uncertainties about the development of the US economy, expectations of further interest rate cuts by the Fed and potential medium-term downward pressure on the US dollar point to additional upside potential for gold prices. The longer the US shutdown lasts, the more anxiety is likely to spread across the financial markets.

I wish all readers a relaxing and possibly extended weekend due to tomorrow’s German bank holiday.