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With the French Presidential election imminent, political turmoil in the East, and a suggestion that the Federal Reserve is likely to increase interest rates, we are seeing an erratic slide, and drastically pessimistic view, on the price of gold over recent weeks.
The speculation of rises in rates alone, tend to have a negative effect on the price of gold, but the combination of the above factors have caused the metal’s price to drop so dramatically in the past two weeks, that many investors are questioning why this is. As a rule of thumb, economic instability and political turmoil has an inverse effect on the price of gold, as we usually see an increase in demand, and therefore an increase in the price. However, as Investing.com report; “that is not happening and Gold is having a rough day in the market today”.
With Gold prices currently trading at around £955 per ounce, compared to the mid-April price of £1033 (a decrease of approximately 7%), the question is whether the prices will rebound soon and is your physical gold investment safe
To understand just what is happening and the possible longer-term effect on the gold price, we have to consider a number of geopolitical factors, including the French & UK elections.
Looking at the price of gold, there was a sharp overnight drop following the first round of the elections,
and a continuing decline since. The French Election first round results, and the potential outcome on May 7th, will certainly be having an impact on the metal’s pricing, but we must bear in mind that the price started to slide, prior to the results of the first round.
Opposing one another in the Elections, are Independent Emmanuel Macron and Front National leader Marine Le Pen. Both have withstood first-round elections and have created quite a bit of controversy among the French. This dissent is spilling out into the streets in the form of protests for and against both sides.
Early polls indicated Emmanuel Macron would comfortably beat Marine Le Pen, in the second round, but many are sceptical and have not forgotten the unexpected Brexit result in 2016 – meaning that nothing can be taken for granted. Some are saying that if Le Pen wins, then the EU would be facing its largest disaster to date, even overshadowing Brexit. This uncertainty, combined with many other pertinent political issues that are important to the future of the country, are affecting the economic outlook and contributing to the instability that is being encountered.
As with any election year, geopolitical tensions can run high and have a significant effect on precious metals. 2016/17 will undoubtedly go down in history as the year Global politics fundamentally changed. With a growing anti-establishment sentiment, The FT.com has referred to it as a “year of political earthquakes”. Later in 2017 (September – October), Angela Merkel will be looking for a fourth term in office. However, she faces a huge electoral challenge as the anti-immigrant, anti-euro ‘Alternative for Germany’ aim to take advantage of her liberal views on immigration and her in-party problems. What, with Brexit, Trump and more recently, a call by Theresa May for a snap General Election in the UK in June; 2017 and beyond is certainly looking like it could continue to be a very difficult period in politics. Certainly, the past year has proven that any assumption of political outcome, is quite dangerous.
Politics isn’t the only factor influencing the prices of physical gold. Economics, naturally, have a massive impact and can cause gold prices to rise or fall sharply, in a matter of minutes. Policy statements by the US Fed and the monthly jobs reports are major catalysts for growth or catastrophic blows.
The latest US Employment report is due out on Friday 5th May and many experts are predicting a robust recovery in the jobs market, meaning unemployment rates in the US are dropping. However, an increase in US labour figures, equals higher inflation rates, subsequently suggesting the Fed are likely to introduce higher interest rates in June. Analysts are predicting that this is very likely to happen. In fact, the probability of this was recently upgraded from 67% to 97%, with the Fed confirming that they remain confident in the US economy.
So, how does this usually affect the gold price Gold is inversely correlated to the interest rate trends because higher interest rates mean people and businesses are hit with higher costs, causing earnings to fall and people having less disposable income. From a business perspective, this can negatively affect the growth of a company and results in falling stock prices. Usually, declines in equities mean the price of gold increases, however, what we’re seeing at the moment, is a combination of factors, creating an unusual pattern.
Incredibly, the markets have been rising for a number of months now, with some European Equity Markets at record highs. This is causing some concern amongst the experts, with the belief that the markets are in dangerously high territory. So much so that many are warning of a stock market ‘bubble’, which could catastrophically burst at any time.
And although not quite agreeing with the term “bubble” even the experts at Seekingalpha.com certainly agree that stocks are currently overvalued.
The pound has gone from strength to strength since Theresa May signalled her desire for a UK General Election on June 8th. We have seen the pound massively benefit from optimism over the result of that election; infact, it hit a six-month high following the announcement, with a four percent gain against the US Dollar. Even if the underlying gold price remains unchanged, an appreciating Pound will push the value of gold down in the UK – which is what we’ve seen since the snap election announcement.
One major factor in June, that will determine the gold price, will be the Fed’s decision on interest rates. If the rates rise, as predicted, this will undoubtedly impact the current stock market ‘bubble’ and indeed may be the catalyst for gold’s recovery – especially if the dollar also rallies.
Daniel Fisher at Physical Gold says “For many investment professionals, Gold is the investment of choice during geopolitical and economic turmoil and savvy investors take advantage of these lower prices, buying gold in bulk to add balance and diversification to their portfolios”. If, as an investor, you’re thinking of starting your own gold nest egg, then you should take advantage of today’s prices and simply ensure you buy at the best price you can find.
Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.