Rising US yields weigh on gold prices

Market report Michael Blumenroth – 17.02.2023

Weekly Market Report

After a short trip to Dubai, including a day trip to Abu Dhabi, yours truly once again became aware of the significance of the most precious of all metals in the local culture. The proverbial gold faucets really do exist...

For many investors it might be regrettable that this enthusiasm did not suffice to support gold prices in the past few days. On the contrary, this morning in US dollars, they dropped to the same level as at the beginning of the year – in euros, we saw a small gain.

This development was due to the significant rise in capital market interest rates and the now increasingly priced-in market expectations that the US Federal Reserve and the ECB will continue to raise key interest rates and leave them at a higher level for some time. While market participants – considering the prices of contracts on futures exchanges – were still expecting a peak of the interest rate hike cycle in the US at 4.85 per cent a good a fortnight ago, they are now pricing in around 5.30 per cent. The two rate cuts of 0.25 percentage points each, until recently expected for the second half of the year, have now also been reduced to a maximum of one. Yesterday, two Fed members also indicated that more rate hikes than previously expected by the markets might be ahead. As a result, yields on ten-year US Treasury bonds rose to 3.89 per cent this morning, their highest since the beginning of the year.

Significantly higher yields for Bunds

Market players now also expect the ECB to take a tougher stance on fighting inflation. At 2.91 per cent, the yield on two-year Bunds is currently as high as it last was in 2008. Ten-year Bunds are also yielding much higher at 2.53, up from 2.07 at their low a fortnight ago.

The supposedly “safe” interest rate of US government bonds or German Bunds is now in direct competition with the “safe haven” gold, which is why gold prices came under pressure. In addition, the US dollar appreciated significantly over the past two weeks, now stronger against the euro than at the beginning of the year.

Gold in US dollars and euros

As a result, gold prices were shaken up. While the precious metal traded at 1,915 US$ per ounce on Friday morning two weeks ago, it slipped by around 2.5 per cent to 1,862 on the same afternoon following publication of the very strong US labour market data, due to the firmer US dollar and skyrocketing yields. Last week, we saw lots of movement for gold prices in a trading range of 1,860 to 1,890 US$ per ounce. With yields continuing to rise, gold prices steadily declined over the course of this week and traded at 1,822 this morning at 8:00.

The price of Xetra-Gold is also lower than at the end of the week before last, with the downward movement somewhat mitigated by the depreciation of the euro. While Xetra-Gold traded at 56.55 € per gram last week, it dropped to 55.30 on 3 February after publication of the US labour market data. Last week, it recovered to 56.55, but again weakened over the course of the week, to 55.00 last Wednesday. Xetra-Gold was expected to start trading this morning at around 55.10.

The markets are likely to continue their close watch of the capital market interest rates’ development as well as central bankers’ statements. Monday is Presidents’ Day, a US holiday.

I wish all readers a great weekend.

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