Why is gold still above $1,200?
As global financial markets begin to unwind for the first quarter of 2017 and as the news headlines gradually move away from the persistent focus on US President Donald Trump, there has been an unusual market trend that has developed over the first three months of the new year — the rebound in the price of gold and consistent strength in the US dollar.
This is not the usual correlation to expect as an investor when you consider that gold is an asset denominated in dollar and strength in the dollar should lead to weakness in gold. Therefore it is time to ask the question: what is actually going on?
In my eyes, investors are hedging on gold because there are still concerns about political risk dominating the overwhelming market sentiment. You see, when it comes to the financial markets political risk used to be something that we would only associate with emerging market economies and not something that investors would need to take into account when it comes to the developed world. That used to be the story anyway, until the events that unfolded in 2016 including both the United Kingdom voting to leave the European Union and Trump winning the US election changed the game.
I personally believe that investors are still remembering those events in recent history and keeping in mind the upcoming elections through Europe over the next couple of months, thus keeping gold as a close ally in case we encounter more surprises when it comes to the political landscape in the developed world.
What needs to be remembered, and although it is Trump that will more likely than not steal the limelight over the upcoming months, is that there are a number of elections throughout Europe over the calendar year, with one of the highestrisk ones being in France in just two months.
Marine Le Pen is certainly seen as another threat to the anti-establishment gaining further momentum in international politics, but is this enough of a reason to have purchased gold?
I guess the answer is can you really downplay the chances of Le Pen pulling off a shock victory after everything else that the international world has experienced over the previous nine months. Some of Le Pen’s rhetoric is incredibly similar to Trump’s, including her promise to fight globalisation and clamp down on immigration. I personally believe that she has more of a following that what is currently being reported and that at least one more political shock is probably on the cards this year.
Even before France goes to the polls, UK Prime Minister Theresa May is widely expected to have invoked the long-awaited Article 50 before the end of the current quarter. In essence, Article 50 represents the UK officially beginning proceedings to leave the European Union and can be summed up as the moment May provides the EU with a letter asking for a divorce.
Brexit is going to represent further risks to investor sentiment and justifies the buying demand seen in gold when you also consider the breaking news earlier this week that the First Minister of Scotland, Nicola Sturgeon, revealed that round two of the Scotland referendum is on its way following the overwhelming majority of Scotland voting to remain in Europe on the night of the EU referendum.
This not only represents a massive
[Investors are] keeping gold as a close ally in case we encounter more surprises when it comes to the political landscape in the developed world
headache to May, but provides plenty of justification for investors to be hedging on gold with it in mind that Scotland would be widely expected as voting to leave the UK at the second time of asking. You can’t blame Scotland for this with it in mind that relations, or at least its importance as a member of the UK has not changed since the first Scottish referendum despite the pledges from London following the first historical referendum as far back as September 2014.
Looking at all the above, there still seems to be a great deal of political risk lingering in the background and this is even before we circle attention back towards Trump. Will Trump be able to implement his campaign promises that have already been priced into the financial markets with heavy premiums? If not, this is going to provide further encouragement to hold a stake in gold in the future.
As part of his campaign pledges, Trump promised to deliver heavily on job creation, deregulation and high levels of US economic growth through fiscal stimulus and infrastructure spending. Yet, in the two months following Trump taking over the White House, investors have still received very little clarity on how he is going to implement these measures. Could investors eventually lose patience and could this then lead to a stock market selloff? If that’s the case then this would again be positive news for gold buyers.
To sum up, it is quite right to point out that it is unusual for gold to be noticing such demand in spite of the consistent strength in the dollar but perhaps all the above plus other factors are justifying why investors are still holding onto gold in their portfolios. The writer is vice-president of market research at FXTM. Views expressed are his own and do not reflect the newspaper’s policy.