Rising returns on bond markets send gold prices southward

Market report Michael Blumenroth – 10.03.2017

Weekly market report

It has been a displeasing week for commodities investors, with falling prices across the board, mainly caused by two developments. First, Janet Yellen’s speech last Friday caused investors to conclude that the Fed will increase the US key interest rate by 0.25 per cent next Wednesday, and the markets are pricing in this probability at more than 90 per cent.

A second impeding factor for commodities prices was the commodities producing countries’ currencies, which weakened against the US dollar. The weaker the home currency, the greater the incentive to sell their commodities.

In Europe, the European Central Bank’s meeting on Thursday was the event of the week. According to Draghi, an exit from the prevailing loose monetary policy is currently not on the table and the ECB is ready for further monetary policy measures should they become necessary. The ECB president further stated that they should, however, have become less urgent due to the fact that deflation risk has evaporated. “There is no longer that sense of urgency in taking further actions”, Draghi said during the press conference following the Governing Council meeting. The markets interpreted the statement as an indication that the ECB might be preparing for an exit from its loose monetary policy, speculation which in turn caused a rise in the returns of government bonds, especially those with a ten-year term. And, as we all know, the higher the returns, the higher the investments in government bonds. 

The week therefore has seen heavy headwind for gold prices. Traded at 1,229 US$/ounce exactly a week ago and at its weekly high on Monday at almost 1,237 US$/ounce, it continually fell to 1,197 $/ounce last night, currently trading marginally firmer at 1,298 US$/ounce. 

The Eurozone followed a similar pattern. From 37.50€/gram last Friday, the price of Xetra-Gold spiralled downward to 36.35 €/gram early this morning before trading commenced.

This afternoon, we await the publication of US labour market data, which will, however, hardly have an impact on the market. What however will be decisive for the development of the gold prices is the Fed announcement scheduled for Wednesday evening, which will give an indication of whether the expected three interest rate hikes for 2017 will be confirmed or even upped to four.

I wish all our readers a sun-filled weekend. 

 

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