Weekly market report by gold market expert Michael Blumenroth

Following weeks in which possible interest rate increases by the Fed for the year 2016 were almost entirely priced out, the past week has seen a turnaround. The economic data published at the beginning of the week paints a friendlier picture of the second quarter of 2016 for the US economy. Retail sales as well as construction and industrial production were well above expectations. US consumer prices also saw a surprising monthly increase (due to the oil price rebound, amongst others), developments duly noted by the Federal Reserve. In addition, a number of Fed representatives publicly declared their expectations for two to three interest rate increases this year. All this was topped by the minutes of the last meeting of the decision makers of monetary policy, published Wednesday evening and indicating an interest rate increase might already be on the agenda at its next meeting in June, or possibly – depending on the pending Brexit decision – in July. 

This caught many market participants by surprise. According to a Bloomberg calculation, the probability for the Fed to increase the key interest rate already in June was still at 4 per cent on Tuesday morning and had increased quickly to 32 per cent by Thursday morning. Similar leaps in probability for an interest rate hike were recorded for the period until July (from 19 to 47 per cent) as well as until December (from 56 to 75 per cent).

This has two negative effects on the gold price. The higher the “risk-free” interest rate in the US, the more difficult it is for gold, being neither an interest- nor dividend-bearing investment. In addition, increasing US interest rate expectations strengthen the US dollar, which in turn increases the gold price in demanding countries outside the US, also making it more lucrative for producers to sell gold and exchange the US dollar profits into the home currency.

The most precious of metals remained quite steady until Wednesday evening. It had climbed from 1,273 US$/ounce last Friday to 1,288.50 US$/ounce on Monday before it fell back to 1,275 US$/ounce due to the strengthening US dollar. From there, the southward trend continued on Thursday to 1,244 US$/ounce. During the course of the day, it was able to somewhat recover and currently trades at 1,255 US$/ounce.
For Xetra-Gold investors, the price slump for gold was buffered to some extent n by the equally weakened Euro. From 36.12 €/gram last Friday, Xetra-Gold rose to 36.38 €/gram on Wednesday afternoon. Following the publication of the Fed minutes, it reached its weekly low at 35.72 €/gram yesterday afternoon before recovering to its current 36.00 €/gram. 

I expect today to remain calm. At the end of May and on 6 June, Janet Yellen will hold two eagerly awaited speeches which market participants expect to hold insight on the further course of the Fed. A probability for an interest rate increase this summer is currently priced in at 50 per cent, which means we will be closely watching the US economic data until then. If things remain calm, a period of consolidation – also for the gold price – might be imminent.

A beautiful spring weekend to all of you.