US labour market data and “flash crash” place gold price under pressure

Market report Michael Blumenroth – 13.08.2021

Weekly Market Report

While the first week of August indicated smooth summer sailing, things turned abruptly turbulent last Friday. The US labour market report for July caught market participants by surprise, with unemployment dropping from the previous month’s 5.9 per cent in to 5.4; the expected drop had been 5.7 per cent. The fact that average hourly earnings also rose to levels higher than expected caused anxiety among a number of investors. Market positions betting on the US Federal Reserve to continue its current extremely expansive monetary policy came under pressure. Capital market interest rates, i.e. yields on long-term US government bonds, moved up quite significantly and the US dollar rose to its highest level since the end of March. Both placed the gold price under pressure.

Sharp drop in gold prices at the beginning of the week

Investors also reduced holdings in various assets at the beginning of this week, as US consumer price data was due for release on Wednesday. The latter had surprised in recent months by rising significantly higher than analysts had previously forecast. In order to hedge against possible further surprises in terms of inflation rates, investors bought US dollars and sold US government bonds. This, in turn, caused yields to rise further. The week thus kicked off with a short sell-off in gold positions on Monday night, met with a lack of market liquidity due to a public holiday in Japan and Singapore. In the meantime, the gold price lost more than US$100 since Friday morning last week before recovering later in the day. The fact that US consumer prices did not rise further on Wednesday compared to the previous month further supported the gold price.

Slight recovery for gold in US dollars since Wednesday

The gold price dropped from 1,801 US$ per ounce last Friday morning to 1,760 that same evening. Illiquid markets during the summer holiday period can result in violent market movement: at the start of trading on Monday, the aforementioned “flash crash” caused gold to plummet to 1,690. It quickly recovered to 1,750 by midday, and after another setback to 1,720 before the publication of US consumer prices, the precious metal traded at 1,755, which is where, despite a few more ups and downs, it started trading this morning.

Similar price development for Xetra-Gold

Although the weakening euro exchange rate slowed down the Xetra-Gold price decline somewhat, it did relent quite significantly compared to Friday morning of last week. Within regular trading hours, it fell from 49.10 € per gram on Friday before last to 47.20 last Tuesday afternoon; Xetra-Gold was not traded at the time of the “flash crash” on Monday night. After publication of the US consumer price data, Xetra-Gold recovered to 48.15 yesterday morning. At the opening of trading today, it should be trading around 48.05.

Low liquidity continues to dominate markets

Market liquidity remains poor, and price fluctuations may therefore be especially pronounced. The upcoming week will likely be calmer in the sense that data which might cause strong volatility is not scheduled for release.

I wish all readers a happy and sunny weekend.

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