Slight headwind for gold due to higher market interest rates and strong US dollar

Market report Michael Blumenroth – 01.03.2019

Weekly market report

Following weeks which saw the gold price on its best behaviour, profit taking seems to have taken over this week. This is due to the following reasons:

Safe havens less appealing

Market participants have apparently grown increasingly optimistic about the global economic situation over the past few weeks. Stock indices worldwide are steadily rising, especially in China, aided by the fact that US President Trump has at least postponed the increase in customs duties on Chinese products, originally planned for 1 March. This can have an adverse effect on the price of gold; positions bought as safe havens are likely to be liquidated. The same is true and currently happening for the safe-haven currency Yen.

Yields/market interest rates on the rise

Secondly, yields/market interest rates for government bonds have been rebounding since the middle of the week. Ten-year US treasuries climbed from 2.63 to 2.73 per cent, and ten-year German government bonds rose from 0.09 to currently 0.185 per cent.

Gold-producing countries see weaker currencies

Thirdly, a number of gold producing countries’ currencies experienced significant losses against the US dollar over the course of the week, such as the Australian and Canadian dollars and the South African rand. The weaker these currencies are and the higher the market interest rates, the more unfavourable this usually is for the gold price. The recent cocktail of market movements thus did have rather a negative influence on the precious metal.

US dollar gold price drops

Gold traded at 1,327 $/ounce on Friday morning last week. It then climbed to 1,333 $/ounce on Friday and traded between 1,325 and 1,330 $/ounce from Monday to Wednesday of this week. On Thursday and this morning, however, the above-mentioned effects set in and caused the gold price to drop to 1,306.50 $/ounce, where it has since lingered.

Similar development for gold in euro

Throughout the week, the euro firmed against the US dollar around noon but had usually lost any of the traction gained by early evening. The price of Xetra-Gold therefore receded from 37.60 €/gram on Friday morning and 37.75 €/gram on Friday afternoon to 36.95 €/gram this morning and has since remained close by.

Interest rate and currency markets decisive

Long-distance runners are familiar with the phase of weakness that can set in during the second third of a run. We’ll have to wait and see how the gold price holds up. It is likely to be heavily influenced by movements on the interest rate and currency markets. Next week's agenda includes US labour market data, an ECB meeting and the National People's Congress meeting in China.

I wish all readers a relaxing carnival weekend.   

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