The gold price is something that we all watch closely as concerns over the health of the global economy arise. Not surprisingly, we’ve seen a significant amount of upturn since October with fluctuation over the last few weeks.
While no one would suggest that we’re witnessing mass panic, the overall sideways drift of the market recently has probably been a result of the overall threat of weaker global economic growth, which has supported the gold price. And what’s the cause of this threat? The main culprits have been the Brexit agreement and its predicted impact on European markets; and the US mid mid-term elections, which set forth the economic outlook for the world super power for the year ahead.
As you’ll know, gold is a safe-haven asset that investors purchase during times of crisis. A general rule is that as we face uncertain or troubled times, the gold price will rise due to the increasing demand for it. Similarly, during times of stability, we usually see the gold price drop.
At the moment though, we’re somewhere in the middle, with overall gold prices steady over the last few weeks. It’s clear that recent economic and political events have not warranted enough public concern for the gold price to sky rocket, but we also haven’t seen the price drop, suggesting that there still remains a considerable level of concern.
Brexit, more uncertainty and a potential leadership challenge
Theresa May has had a difficult time recently convincing the UK that her version of the Brexit deal is the one everyone was waiting for. In reality it is very far from what most have hoped for, and even her own party have issued multiple no-confidence letters in response to her proposed plan to bring Britain ever closer to the finishing line with a final deal.
Pledging to push forward with her agreement with the EU, May has commented that removing her from the position as PM would be a dire move for Britain, potentially derailing the process from being completed at all. A no-deal Brexit is what most people fear.
Amidst all this, it is still the terror of the unknown for both the UK and Europe that poses the greatest risk to economies in this region. The impact on industries and different sectors that rely on efficient and smooth trade between these regions will surely feel the impact if Brexit is executed poorly.
The automotive industry has even gone as far as to deliver a number of official statements outlining the potentially disastrous consequences Brexit could have on their sector and the national economy on the whole.
Jeremy Corbyn, opposition Labour leader, speaking at the CBI conference said May’s deal is a “botched, worst-of-all-worlds deal which is bad for Britain,” which rings true for many Brits. But more than two years after the United Kingdom voted to leave the EU, it’s also true that many are simply tired of the surrounding discourse and very keen to see an end to the process, despite how unattractive May’s deal may appear.
But is this a serious enough geopolitical factor to disrupt the world marketplace? We’re still waiting to see.
US stability following mid-terms
Meanwhile in the US, following a dramatic election night, the waters are much calmer as the nation accepts the result and proceeds with business as usual. President Donald Trump’s Republican Party was able to retain control of the Senate, while the Democrats were able to take control of the House of Representatives. A balanced outcome some would say.
Many economists believe the US mid-term election will ultimately have a positive impact on world economies. What we’re seeing is not a political rupture, but a relatively stable outcome that allows US markets to proceed unaffected by national hysteria or strong public sentiment that might otherwise have ensued.
Trump’s willingness to communicate with foreign trading superpowers following the results also bodes well for the global economic outlook with an outward-looking US economy a good sign of potential deals and international growth.
There may well be other problems in the US political system, but where gold is concerned, it’s only major ruptures that seem to impact the gold price to any considerable degree.
The rising rates
Many investors believe that higher interest rates drive down the gold spot price. This is because as interest rates rise, bonds and other investment options with high yields become more attractive.
So will the raising of US interest rates by the Federal Reserve and the rise of the UK base rate by the Bank of England earlier this year impact the value of gold? Although these are noteworthy events in both the nations’ histories, with interest rates typically at low rates since 2009, we’re not likely to see much of an impact on the gold market.
The reason being that despite the popular belief of a strong negative correlation between interest rates and the price of gold, a long-term review reveals this relationship isn’t so obvious. It’s true that this may be a contributing factor to the overall value of gold, but it’s probably not the best signal that you should be preparing to sell all your gold before the price drops.
What does The World Gold Council say?
The World Gold Council (WGC) highlighted a few interesting facts in their Q3 report on the gold market. Commenting on the market and recent trends that have taken place, the WGC stated that recent stock market volatility and currency weakness boosted demand in many emerging markets.
It’s always interesting to see what China is doing when we’re talking about the economy. Now the world’s largest gold bar and gold coin market, it saw demand for these items rise 25 per cent year on year since 2017.
Also, the WGC noted that lower gold prices during July and August encouraged bargain hunting amongst price-sensitive consumers. If political and economic stability ensues in 2019, this is perhaps a trend that might continue. But first we’ll have to see how things play out with Brexit.
In general, recent developments over Brexit and the other world market factors don’t seem to have disrupted the gold price too much.
With some interesting upturns over October and November the gold price has remained moderately steady. But as always, it may be a good time to invest in gold if your glass ball tells you we’re heading for tough times ahead. Who knows how much of an impact the Brexit deal will actually have on the UK and Europe when it finally goes through. Exciting times ahead for gold investors indeed.