Gold price holds above $1,200 as political risks ramp up

(March 15, 2017 - by Sharps Pixley)

Brexit could be triggered as soon as tomorrow, while the Dutch go to the polls on Wednesday . . . .

The gold price is holding its ground today. The yellow metal is back above the psychologically key level of $1,200 an ounce as investors seek protection from political risks.

Gold slipped below the threshold on Thursday and fell again on Friday afternoon in London as evidence continued to mount that the Federal Reserve would increase US interest rates again this week.

But gold ended the final session of last week slightly higher. After a positive Asian session overnight it was 0.3 per cent higher at $1,204 an ounce this afternoon in London.

The gold price tends to fall when rates are set to rise as the metal does not offer a yield and so loses out to income-bearing assets.

Yuichi Ikemizu, head of commodity trading at Standard Bank in Tokyo, told Reuters that "people are now quite sure that interest rates will go up" and that this is "discounted into the gold price".

Last week market bets on a rates rise at the Fed’s March meeting rose to more than 80 per cent.

The focus is on the "safe haven" value of gold as potentially destabilising political events loom that could rock the global economy and so weaken demand for risk assets like equities.

The UK government has made it clear it intends to trigger Article 50 and formally begin the Brexit process as soon as tomorrow.

To do so would probably result in the House of Commons rejecting amendments to the legislation that was passed in the House of Lords last week, including the guarantee of a parliamentary vote on any EU deal.

Meanwhile the Dutch are going to the polls on Wednesday in the first of three major general elections in Europe this year, which will test the support for far-right populists.

Geert Wilders’s Party for Freedom has led the polls for much of the campaign. As most of the main parties say they’re not prepared to work with Wilders this could pose a problem when forming a stable coalition government.

"Gold should find some safe-haven bids at these levels this week as the Dutch election became more fraught over the weekend," said Jeffrey Halley, a senior market analyst with OANDA.

Gold price below $1,200 on rates expectations 

10 March

Gold has fallen below $1,200 an ounce, continuing a recent bearish run as bets grow on the US increasing interest rates next week.

Trading overnight dipped below the threshold for the first time since the end of January, hitting a low of $1,196 an ounce. It pared losses this morning before turning negative again this afternoon.

This reflects the broader pessimistic view on gold that has taken hold of late, relating to economic data suggesting the Federal Reserve will increase interest rates in the near future.

The keenly watched non-farms payroll report, a monthly update on the number of jobs being created in the US economy, shows employers are estimated to have added 235,000 new jobs in February, well in excess of the 200,000 expected by analysts, reports the Financial Times.

Unemployment ticked down from 4.8 to 4.7 per cent – holding below the five per cent considered by many economists to indicate "full employment" – while wage growth accelerated slightly from 2.6 to 2.8 per cent.

All in all, it is hard not to see the figures as corresponding to the economic data remaining "strong", which Fed chairwoman Janet Yellen said last week would make an interest rates in the near future "appropriate".

Rate-setters meet again next week and bets on a rise have gone from 30 per cent at the beginning of this month to more than 80 per cent.

Rates rises tend to be negative for gold, which does not offer an income and so loses ground to yield-bearing assets.

Gold price hits four-week low on expected US rates hike

08 March

Investors are betting strongly on another increase in US interest rates next week and gold is falling in response.

Yesterday, the metal fell to $1,213 an ounce, its lowest level since 3 February. Despite having trimmed its losses overnight, it was sliding again this morning and stood at a dollar below yesterday’s four-week low.

Helping trigger this downward trend have been comments from Federal Reserve officials pointing to a rate rise at their next policy meeting next week.

In particular, on Friday, Fed chairwoman Janet Yellen said explicitly that "a further adjustment of the federal funds rate would likely be appropriate" if the economic data remains strong.

Investing.com says "at the current level of market odds, a March hike is now locked in".

Reuters adds that "early last week, financial markets saw just a 30 per cent chance of the Fed raising interest rates in March; but by Friday… traders saw an 80 per cent chance".

Gold tends to respond badly to rates increases, as this boosts the value of income-bearing assets at the expense of non-yielding alternatives such as commodities.

Rising rates also typically coincide with a rising dollar, against which gold is often held as a hedge. In addition, they indicate rising confidence in the economy, which boosts risk assets and undermines gold’s appeal as a "safe haven".

However, while gold is down on recent levels, trading remains well above its position late last year and ahead of where analysts expected it to be.

Societe Generale, for example, predicted an average gold price of $1,175 an ounce this year, while the World Bank believes it will average around $1,150.

Investing.com says: "Investors should not forget that real interest rates are what really matters for gold prices – a small rate hike may not be enough to combat inflation and raise real interest rates.

"The Fed being behind the curve is a positive factor in the gold market."