Waiting for Wednesday

Market report Michael Blumenroth – 16.09.2016

Weekly market report

A difficult week in terms of gold prices is now behind us, but the reasons why they came under pressure over the course of the week remain uncertain.

Originally, the small gold rally of the past week was slowed down by the statements of Eric Rosengren last Friday. The Boston-based US central banker warned against an overly hesitant interest rate policy and an overheating of the US economy should the Fed put off an interest rate increase for too long. His words were interpreted as an indicator for an impending Fed interest rate hike.

As a consequence, US government bond returns increased and the US dollar rose in value. Both factors had a negative impact on the gold price. On Monday, another Fed member, Lael Brainard, dampened expectations for an interest rate hike, allowing the stock markets to recover from Friday’s losses and forcing the US dollar to back down. 

At this point, the gold price should have been able to recover – bit it did not.

While gold traded at 1,347 US$/ounce just last Friday, it closed the current week at 1,330 US$/ounce. In spite of Brainard’s calming words, the gold price was unable to recover above the 1,330 US$/ounce mark. Quite the contrary: it stumbled to 1,310 US$/ounce yesterday afternoon and currently trades at a mere 1,314 US$/ounce. 

I would explain these events with the higher returns on long-term government bonds, which saw a significant increase over the past few days both in the euro zone and the US. The higher the safe interest rate, the more attractive government bonds become as an investment alternative for gold. In addition, the ECB did not decide on any new monetary policy measures, which would have been supportive to the gold price. For weeks, gold has been experiencing a sideways development and has once more failed to break free in an upward movement. This is likely to have led a number of investors to sell their gold holdings. On a side note: oil is currently seeing a similar chart development.
Xetra-Gold – with holdings that have surpassed the 100 ton mark – has thus also depreciated slightly this past week. From 38.50 €/gram last Thursday afternoon, it fell to 37.50 €/gram yesterday and currently trades at 37.70 €/gram. 

The market is now eagerly awaiting next Thursday, hoping that the Fed will finally paint a clearer picture of its plans. We will have to wait and see.

For now, it’s time to enjoy the weekend.  

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