Home Markets Rising Gold Prices Signal Risk is Afoot

Rising Gold Prices Signal Risk is Afoot


Despite the recent equities rally on Wall Street, gold prices are up nearly 8% this year, as political uncertainty fuels fresh demand for the safe-haven commodity.

Gold for April delivery settled at $1,239.10 a troy ounce on February 17, just below the prior session’s three-month high. The futures contract nudged up 0.3% for the week and has advanced 2.3% since the start of February.

May silver futures closed at $17.98 a troy ounce on Friday, extending its winning streak to seven consecutive weeks. Silver has outperformed gold in percentage terms, having gained 12.4% since the start of the year. One ounce of gold is now worth less than 69 ounces of silver. This ratio was as high as 72.5 earlier this year.

Precious metals are widely viewed as hedges against inflation and geopolitical risks. The threat of the latter has sparked renewed buying interest among investors worried about a more protectionist White House under President Donald Trump. Since being inaugurated on January 20, President Trump has adopted a much more protectionist stance than his predecessors. This included signing an executive degree that withdrew the United States from the Trans-Pacific Partnership (TPP), a bilateral trade agreement involving 12 countries.

In a more controversial move, Trump issued an executive order temporarily banning immigration from seven-Muslim majority countries. The decree was eventually overruled by appellate judges.

The Trump administration is also considering a broad crackdown on America’s temporary foreign worker program, fueling fresh worries about labor shortages in key industries like information technology.

The Trump administration isn’t the only source of political risk driving investors to gold and other haven assets.The United Kingdom is moving closer to exiting the European Union (EU) after Parliament voted in favor of starting the Brexit process. On February 1, Members of Parliament voted 498 to 114 to advance a bill that gives Prime Minister Theresa May the authority to trigger Article 50 of the Lisbon Treaty – the formal mechanism for leaving the EU.[1] Invoking Article 50 gives the UK and Brussels two years to negotiate a new bilateral trade agreement. For investors, that’s two years of potential uncertainty.

Brexit has strengthened right-wing populism across Europe, with anti-EU parties gaining momentum in France, Germany and the Netherlands. Each of these three countries will vote in federal election this year. Euroscepticism is also gaining ground in Italy after Prime Minister Matteo Renzi resigned following a failed referendum to reform the constitution. This leaves the door wide open to the Five Star Movement, another anti-EU party, to make significant inroads in the 2018 elections.

Gold prices have also been pulled higher buy a sputtering U.S. dollar, which until recently, faced strong downward pressure. The dollar index, which tracks the performance of the U.S. currency against a basket of global peers, fell to three-month lows at the end of January. Gold is priced in dollars, and is therefore highly sensitive to fluctuations in the currency.

The dollar has rebounded sharply in February, but this has failed to weaken demand for gold. This suggests investors are hedging against an increasingly volatile global political climate.

[1] Laura Smith-Spark (February 1, 2017). “Article 50: UK parliament votes in favor of starting Brexit process.” CNN.

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