As witnessed in the early hours of the day, uncertainty due to political risk can bolster gold exchange traded funds. With continued political volatility ahead, investors may turn to safe-haven assets like gold.
The knee-jerk reaction to Donald Trump’s win in the presidential elections was a plunge in global equities markets and surge in safe-haven demand, which helped propel gold futures to over $1,300 in early trading Wednesday. However, as markets mellowed out, the SPDR Gold Shares (NYSEArca: GLD) pared early gains and was down 0.2%, with Comex gold futures trading at around $1,272.7 per ounce.
Nevertheless, political risk surrounding elections across the globe may continue to support gold.
“We are seeing increasingly fractious politics across the advanced economies, and this trend, combined with uncertainty over the aftermath of years of unconventional monetary policy measures, will firmly underpin investment demand for gold in the coming years,” Juan Carlos Artigas, Director of Investment Research at the World Gold Council, said in a note.
Gold trading volumes have already surged in Asia. For instance, in China, SGE volumes jumped to 330 metric tons, or 102% higher than the level seen around the Brexit vote, according to the World Gold Council. Moreover, anecdotal evidence suggests that institutional investors and hedge funds have yet to jump in, which indicates that gold demand has more room to run.
“We believe that retail demand will also surge, as investors wake up to a fundamental political change in the world’s largest economy,” according to the World Gold Council.[related_stories]
Further supporting the gold outlook, swaps traders are pricing in a lower chance of a Federal Reserve interest rate hike, betting on a 50% likelihood of a hike, compared to 82% on Tuesday.
Meanwhile, uncertainty in Europe can also fuel demand in the region. Market observers are calling for a so-called hard Brexit. Elections in Italy, France, Germany and Holland could also see an increase in anti-establishment and populist parties.
“In our view, the intense political uncertainty that advanced economies now face, combined with the unknown aftermath of years of unconventional monetary policies (quantitative easing, zero and now negative interest rates) will make gold particularly valuable to investors in the coming years,” according to the World Gold Council.
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SPDR Gold Shares