Political uncertainty in Europe could boost gold price

Suki Cooper Precious Metals Analyst

23 Feb 2017

While the price of gold faces stubborn headwinds in 2017, US inflation, Brexit negotiations and the uncertainty surrounding Trump’s foreign policy could trigger another bout of demand for the precious metal.

While the price of gold faces stubborn headwinds in 2017, US inflation, Brexit negotiations and the uncertainty surrounding Trump’s foreign policy could trigger another bout of demand for the precious metal.

Furthermore, elections across Europe this year have scope to shock markets again, increasing safe-haven demand for gold, as investors fear systemic risk.

Of course Europe has faced systematic risk before, such as heightened uncertainty surrounding Grexit in 2015, but this has not been sufficient to drive material demand for gold. But the events of this year are likely to be different, with potential to reverberate through the global economy.

Gold is likely to dip ahead of the US Federal Reserve meeting in March, but expect a rally in the second quarter of 2017 – and for it to be the strongest quarterly performance of the year.

Gold is bound to regain its shine, averaging USD1260 per ounce in the second quarter, up from USD1.240 today

Following Britain’s vote to leave the European Union (EU), and the unexpected victory of Donald Trump in the US presidential election, the next three political events markets will focus on are the general election in Netherlands, the presidential election in France and federal election in Germany.

In each case, gold could suffer initially as investors seek liquidity, given concern that anti-EU parties could win and threaten the future of the EU, but before long gold is bound to regain its shine, averaging USD1260 per ounce in the second quarter, up from USD1.240 today.

Consumer interest on the up?

It’s not just the political landscape and future of the EU that’s causing concern for Europe. Troubles also surround European financial markets, with concerns over the banking sector, particularly in Germany and Italy.

The gold price dropped initially following the collapse of Lehman Brothers in 2008, as investors sold off the metal amid cash shortages and margin calls. Later on in the crisis, however, gold attracted interest from a broad range of buyers, expanding its universe of investors from individuals to institutions.

We do not expect that anti-EU parties will come to power and govern outright in 2017, but gold could find a new source of demand in the uncertainty leading up to these elections.

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