How will the general election affect gold prices?

Goldex Team

Editorial content

Unlucky for some

It’s been touted as the most important general election for a generation – but it’s also one of the most unpredictable and divisive in recent memory. So just what will the markets look like when the UK wakes up on the morning of the less than auspicious Friday 13 December?

One thing’s for sure: whoever wins – if, indeed, one party does gain a majority – it’s likely to herald a new period of economic uncertainty, rather than usher in a period of stability.

As Trevor Greetham, head of multi-asset at Royal London Asset Management points out in the Financial Times, a Conservative victory raises the spectre of a new cliff-edge at the end of the transition period, while Labour’s domestic policies, such as nationalisation, would create a different kind of uncertainty. And if there’s one thing the markets don’t like, it’s uncertainty.

Nobody knows anything

Traditionally, markets respond positively to a new Conservative government and negatively to a new Labour government. But as a decade where so many certainties have dissolved, history certainly isn’t a reliable guide anymore. In the famous words of screenwriter William Goldman, when it comes to British politics, ‘nobody knows anything.’

Polling for the last election certainly didn’t tell the whole story, with the vast majority predicting a narrow Tory victory rather than the hung parliament, which became obvious at the exit polls.

And old party loyalties of class and region have crumbled in the face of Brexit, making numbers even harder to predict. Former diehard Labour voters keen to leave the EU are now turning to the Brexit Party and the Conservatives, while former Conservatives equally passionate to Remain could turn to the Liberal Democrats – the only one of the three main parties to take an overtly Remain stance.

In this scenario, Labour could be the big loser. Jeremy Corbyn has stated that if Labour wins, he’ll immediately legislate to hold a ‘final say’ vote. That could be Remainers’ best chance of stopping Brexit for good. But the Remain camp are by no means agreed on this: many find the Lib Dems clear ‘revoke and remain’ stance far more attractive than another referendum.

Tories ahead

So far, with the caveat that a lot can change in the final week running up to an election, most polls are predicting a Conservative victory. The majority of polls have seen the Tories out in front by several points, though with a five-point margin of error, there’s plenty of room for movement, and it’s wise to take an average of polls rather than rely on one or two.

Political forecasting site Electoral Calculus says the Tories will win 348 seats to Labour’s 227. 326 is needed for a majority; the Brexit party’s decision not to stand candidates in seats held by the Tories will have helped, avoiding a Leave voting split. Nigel Farage has made it clear that his priority is to enable Brexit and prevent a second referendum.

In a similar move, the so-called Remain Alliance – the Liberal Democrats, Green Party and Plaid Cymru – will stand down candidates in 60 seats to maximise their chances of success. But it may not be enough to make a difference.

Source: The Telegraph

Troubled times

However, there’s one thing which is certain: in times of trouble, it’s good to have gold in your portfolio. Traditionally a safe-haven investment, gold has historically held and built on its value when times are turbulent.

With all the recent missed deadlines, last-minute dashes to Brussels and consequent extensions surrounding the actual Brexit process, gold has hit record highs recently. And as gold thrives on uncertainty, it could go higher still if the general election fails – like the last one – to deliver a Parliament where there is a clear majority for a Brexit decision one way or the other.

As Commerzbank commented to The Week back in September: “We see the ongoing steep rise in the gold price as an expression of the high-risk aversion among market participants. Gold is quite clearly still in demand as a safe haven in the current market environment.”

Another thing to consider is that even if gold does not move significantly off the back of the election, the pound will be extremely sensitive and volatile to developments that surround it – including the exit polls. Any gold that you may have as an investment could increase based on the valuation of the pound.

The pound’s value will almost certainly fall on news of a hung parliament, minority government or Labour victory, but will likely rally higher on a Conservative majority, as the latter is the the most ‘stable’ of all potential outcomes – a majority means that the Conservatives will have more power to push through a Brexit deal, and as mentioned, the markets love stability more than anything else. However, with the Conservatives’ lead narrowing in the days up to the election, this is currently far from a given.

So, when it comes to general election predictions, don’t necessarily bet on Boris: go for gold instead.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.