Gold price and geopolitics – friend or foe?

Goldex Team

Editorial content

Traditionally, gold does well in times of economic and political turmoil, because of its safe haven status. Wars usually mean higher demand for gold. Prices have risen as more people look for somewhere secure to park their investment. And right now, there’s no shortage of conflict – from trade war to the prospect of actual war.

North Korean missile tests

In 2017, gold prices surged when North Korean leader Kim Jong Un began testing nuclear ballistic missiles and President Trump responded aggressively, sparking fears of a nuclear conflict. Meghan Milloy, director of Financial Services Policy at the American Action Forum, told The Washington Post: “I would attribute some of the rise in the price of gold to the feeling of uncertainty surrounding that [North Korean-U.S.] dialogue.”

China-US trade wars

And what Trump is thinking also feeds into where the China-US trade war is heading – at the time of writing, nobody knows how that’s going to be resolved. Right now, it’s heating up, with the US announcing that they plan to whack tariffs on $200 billion of Chinese imports up from 10% to 25%. And that’s spurred nervous investors on to buy big, sending gold prices rocketing to a three-week high.

As Fawad Razaqzada, market analyst at Forex.com, told the Guardian: “Given the corresponding sell-off in stock markets over the same period, gold’s positive response is almost entirely due to a rise in risk aversion, owing mainly to renewed concerns over US-China trade spat.”

US-Iran tensions

Tensions are also rising between the US and Iran with the announcement that the pariah state is planning to row back on some of its nuclear deal commitments (which the US quit last year), including threats to resume high-level uranium enrichment. Aircraft carrier USS Abraham Lincoln is on the way to the region, and the US is expected to announce more sanctions. American National Security Advisor John Bolton said that the US isn’t seeking war – but is ‘fully prepared to respond to any attack.’

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Selloff in Venezuela

But crisis doesn’t always lead to rising gold prices. Venezuela, deep in economic and political turmoil, and now entering its sixth year of recession, recently offloaded $400m of gold. Analysts were divided: “Of course it impacts the gold price. Anytime you have a large supply overhanging the market, it impacts trading. It did not help attract buyers,” RBC Wealth Management managing director George Gero told Kitco News.

However, TD Securities commodity strategist Daniel Ghali disagreed, telling the website that he didn’t think Venezuelan sales were causing gold to slide. “From one particular country — Venezuela — I don’t think it would necessarily impact prices on the day.” He said it was more likely the market was looking at a broad set of countries – China, in particular, which has been accumulating gold over the last few months.

China stocks up gold

Other analysts have also pointed out that if you’re going to watch any country’s gold purchases and sales, watch China rather than Venezuela. It’s stocking up. The FT recently reported that China’s central bank added gold to its reserves for the fifth month in a row in April, taking total holdings to around $78.3bn…

So how will all this turmoil affect the global economy – and the price of gold?

Several experts predicted that 2019 would see the start of a big slowdown. At the beginning of the year, manufacturing hit the buffers in Germany, Japan and even the US, while China concentrated on reducing debt rather than growth. But now it’s aiming to grow its economy again. And that could mean we won’t see the predicted slowing worldwide, meaning that investors turn away from gold and the price goes down.

The yellow stuff rightly enjoys the status of a safe harbour when geopolitical waters are turbulent. But even calm inlets are going to feel the ripple effect from a big wave – however far out to sea it is. So when you’re making your investment decisions, make sure you take a global view..

 

 

 

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, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.

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