Strong US dollar causes slowdown in gold

Market report Michael Blumenroth – 29.03.2019

Weekly market report

It’s been an interesting couple of days on the markets. And Brexit, which was supposed to take effect today, will keep us guessing us for a while longer.

Once again, the price of gold was swayed by movements in other markets. It got a boost at the end of last week / beginning of this week following the Federal Reserve’s statement on Wednesday last week that it does not intend to raise interest rates further in 2019. The Fed’s pessimistic outlook on the global economy seemed to cause unease among market participants.

Government bond yields decrease

This led to a significant decline in yields on government bonds, which are usually considered safe. For example, yields on ten-year German government bonds slipped back into negative territory for the first time in more than two years. This means that the investor actually pays for the privilege of financing the government’s debt. Yields also decreased significantly in the US. Many market participants now expect the Fed to not only stop raising interest rates in 2019, but to lower them once or twice.

Attention was also drawn to the fact that the yield on 3-month Treasury notes has been higher than that on 10-year Treasuries since last Friday. With one exception in the past, this has always been a sign that a recession was on the rise within the next six to 24 months.

Stocks slide, US dollar rises

Last Friday, stock indices worldwide declined sharply. By contrast, safe havens such as government bonds, the Swiss franc, the yen and gold were in demand. Yesterday, we saw a slight recovery. However, the rise in the US dollar, particularly against producer currencies such as the South African rand, negatively impacted the price of gold. The US Dollar Index (DXY) gained about 1.2 per cent this week.

In US dollar terms, gold traded at 1,310 $/ounce on Friday morning last week. It climbed to 1,324.50 $/ounce on Friday and Monday evening. With the strengthening US dollar and weaker emerging markets currencies, gold fell to 1,310 $/ounce by Wednesday – and even more sharply yesterday and tonight down to 1,287 $/ounce. The precious metal is currently trading near 1,288 $/ounce.

Euro significantly weaker

The euro has been significantly lower against the US dollar since last Friday (amid very weak data on purchasing managers’ indices in the eurozone) despite the Fed’s pause on rate hikes, dropping from 1.1390 to 1.1214 and the current 1.1230 EUR/USD, respectively. This slightly mitigated the decline in the price of gold in euro terms.

Thus, the price of Xetra-Gold rose from 37.10 €/gram last Friday morning to 37.65 €/gram on Wednesday this week. However, the decline in USD-denominated gold also impacted the price of Xetra-Gold, with the latter falling significantly yesterday to trade at the current level of 36.85 €/gram.

Trade conflict, Brexit and recession fears in focus 

Markets are now waiting for further developments in the US-Chinese trade conflict. Furthermore, a hard Brexit by 12 April could potentially cause turmoil. And it is questionable whether fears of a recession will ease in the coming days – which could help the gold price.

I wish all readers a nice spring weekend.

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