Macrh Market Update
Following the results of the Brexit vote last year and the impact on the precious metal market which ensued, it would be easy to assume that due to the announcement of the plans to trigger Article 50 of the Lisbon Treaty, similar market uncertainty would now be apparent . The legislation that begins the 2-year exit of the UK from the EU is set to be triggered on Wednesday the 29th March, but will this create increased demand in precious metals as previously seen following the referendum vote in 2016?
After the announcement by Theresa May on the 20th March, there was some movement in the exchange rate as pound sterling moved up against the dollar in early trading but later declined. The price of gold, when measured in sterling terms, also rose steadily in early trading to around £994 per troy ounce. However, changes like this fall short of the much larger losses and gains which we saw following the initial Brexit decision last year. Many market commentators suggest that such movements in the pound are short-term ‘knee-jerk’ reactions and part of the recent decline in sterling is more attributable to the recovery of the dollar and US Treasury yields. Some are even suggesting that when Article 50 is invoked, the pound could either not react at all or may actually rise as months of uncertainty are lifted.
If we focus solely on the price of gold, although there may have been significant changes and fluctuations during recent weeks and months, many market analysts are suggesting that the triggering of Article 50 is likely to have less of an effect than some will expect. This is partly because Article 50 is a ‘known event’ and markets are said to be able to react in advance of known events and ‘price them in’. If the event is an unknown or unexpected occurrence, the results usually reflect this.
But what does affect the price of gold?
As history has shown, there are many factors which influence the price of gold. If we take a short look back, the performance of gold in the first half of 2016 was better than had been seen for many years. In February 2016, we reported that gold prices had risen by over 24% and silver prices had also increased by 14% across the same period. This was said to be prompted by falls in oil prices and an increase in safe-haven trading in the market place. Although the news was already full of stories of a possible ‘Brexit gold rush’, the very possibility of a ‘Brexit’ was still seen as an unlikely event. Throughout the year, a variety of other factors came into play which had an impact including low to negative global government bonds, geopolitical risks and the U.S. election.
However, during the first part of 2017, the market place has been noticeably different.
India & China
One factor which is often cited as a significant influence in the price of gold is demand in both India and China. India and China are the largest consumers of gold in the world, and a decline in demand in either of these countries can have wide implications across international markets. Earlier this year, Indian Prime Minister Narendra Modi began demonetization efforts to combat undeclared earnings and tax evasion. This surprise move sought to remove certain high-value currency notes from circulation in the country. Aside from the desired effect, this move was said to have left many low and middle-income Indian citizens without the required cash to purchase gold jewellery for weddings and investment. This move also caused gold demand in India to fall sharply. However, during March this year, it was reported that there had been a threefold increase in gold imports in February compared to the same period last year ahead of the upcoming festival and wedding period, showing that demand was again increasing, suggesting to some that the longer term outlook in India is positive.
Similarly, as one of the biggest economies in the world, the situation in the USA always has wide-reaching implications on global markets and factors like the strength of the dollar are under constant scrutiny. Although discussion the effect Trump will have on the market has somewhat dwindled recently, in early March, the emphasis was around increased suggestions that the Federal Reserve was set to introduce an interest-rate hike when they met later in the month. Any suggestion of a change to the interest rate historically has an effect on the gold price and comments and discussion surrounding this possibility continued.
Importantly, changes to the interest rate by the US Federal Reserve also tend to boost the US dollar. This is because historically, the dollar and inflation have had a tendency to trade inversely to each other as a lower dollar can lead to a boost in inflation. It is also the case that higher inflation tends to weaken the dollar as investors consider holding assets in other currencies. Higher rates are also important as they are said to reduce the appeal of owning gold because it doesn’t pay interest.
As well as the interest rate, many also emphasise the importance of U.S. Jobs data. During February, the U.S. economy created more jobs than expected and The Bureau of Labor Statistics reported that 235,000 jobs were created, whilst economists were expecting to see job gains of around 196,000.
Following the meeting of the U.S. Federal Reserve, the decision was made to raise interest rates as expected however the Fed said in a policy statement that further increases would be ‘gradual’. Officials suggested that there would be two more rate hikes this year and three more in 2018. The Fed only increased rates once during 2016 however prior to the recent decision, investors had been pricing in at least four rate increases this year. This shows that although some events are expected, they may not be quite as predicted.
Triggering Article 50
In terms of Article 50, the results are of course still yet to be seen. As previously suggested, the actual event itself of triggering Article 50 is said to be scheduled for 29th March 2017 but this is just the beginning of a 2-year long process of events. During this time, a summit is expected to be called where the leaders of the remaining 27 member states discuss a mandate for negotiations with the UK. In addition to this, the French presidential and German parliamentary elections are scheduled to take place as well as months of ongoing discussions surrounding trade-deals and negotiations. Although Article 50 imposes a 2-year limit on negotiations, some have suggested that arranging effective and mutually beneficial trade deals could take as long as a decade. If triggering Article 50 itself does little to shake the markets, the repercussions certainly have some potential to.
You can read Article 50 of the Lisbon Treaty on the official website here.