The US tax payer’s pleasure is currently the gold investor’s pain

Market report Michael Blumenroth – 08.12.2017

Weekly market report

uring the past two weeks, the US tax reform progressed at a surprisingly fast pace. The majority of market observers now believe it possible that said tax reform might be whipped into legislative text by Christmas. Why is this significant for the markets? In the short term, the tax reform might very well lead to a small economic boom in the US. This, together with the fact that lower tax revenue will lead to a significant increase in US national debt, will cause returns on US government bonds to rise, which, according to textbook wisdom, in turn will temporarily lead to a firmer US dollar.

In the medium term, however, inflation expectations could also rise, which could jump start the gold price. As we know, higher US interest rates and a strong US dollar are the natural “enemy” of the gold price. It was therefore inevitable that the gold price came under pressure.

While gold traded at 1,291 US$/ounce exactly two weeks ago, it climbed to 1,299 US$/ounce on Monday 27 November, almost reaching the mark of 1,300 US$/ounce. However, in the days that followed, it saw a steady southward development, hitting its four-month low of 1,244 US$/ounce yesterday evening. This was mainly due to the rise in market interest and returns on short-term US government bonds. An increasing number of investors believe that the Fed plans further interest rate hikes in 2018. Currently, Gold trades at 1,249 US$/ounce.   

The weaker old price in US dollar of course also affected the price of Xetra-Gold. From 35.05 €/gram last Friday, Xetra-Gold was able to rise to 35.15 €/gram by Wednesday 29 November (which, by coincidence, was the ten-year anniversary of Xetra-Gold), before changing course and falling to 34.15 €/gram yesterday evening. Currently, it trades at 34.20 €/gram.

Looking ahead, the Fed meeting on Wednesday evening and that of the ECB are holding market participants in suspense. They are hoping for indications regarding the central banks’ monetary policies in 2018.

I wish all of our readers a relaxing weekend – perhaps enjoy a mug of mulled wine against the cold and to get into the holiday spirit. 

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