Political tensions help gold rise

Demand from the two biggest consumers of Gold; China and India, were historically quite weak in the previous year, however the amount of uncertainty via political risk such as Brexit and the US Election have both served to drive demand and inversely hamper it. 

The unexpected outcome from Brexit is reflected in the Gold chart below; as equity markets rallied ahead of the “sure thing” that was expected to be Bremain, Gold was sold off to $1250. Following the vote the price of the commodity rallied over 5.6% as investors fled the risky markets looking for a home to protect their cash and Gold soared to a two year high at $1375.

Conversely the opposite occurred with the US Election as the Trump victory spurred on equity investors in the USA. Gold lost more than 11.4% up until late December, following the rhetoric of increased infrastructure spend and relaxation of banking regulation and the repeal of parts of the Dodd-Frank act.

Global demand has since increased; namely some retail buying over Christmas and the Western new year; the Chinese Lunar New Year, ending on January the 28th, characterized by traditional purchasing of 24k gold; and arguably as we enter spring the demand for gold in the western hemisphere increasing as wedding season sees a spate of buying in preparation for the big day. Following on from this we should see the demand cycle dip toward July just before upping the ante again ahead of Indian wedding season and the Diwali religious festival kicking off in October.

So why is Gold rallying now?

Global indices have started to pull back, finally taking a breather from their strong move emanating from November and what seems like a US economy building into a Juggernaut, led by a Megalomoaniac with his finger on the trigger of the worlds largest missile stockpile. Therein lies the answer…political risk. Now raising its head in a different form, this time in the frame of the largely condemned missile strike on Syria’s Shayrat airbase in response to a chemical attack that reportedly left 80 people dead. Since then political and market pundits have weighed in on the right and wrong of the decision to unleash almost sixty Tomahawk missiles, clearly showing a sign of strength.

In the interim China has reportedly amassed over 150 000 troops on the border of North Korea in preparation for pre-emptive strikes following on from the US endeavour, with the US Navy moving the USS Carl Vinson aircraft carrier strike group moving from Singapore to North Korea following on from an increase in missile testing by the state; according to the Dailymail online.Tensions are high and investors are concerned that the chess pieces are precariously being positioned for what could be the check mate for Pyongyang’s weapons programme.

The technical outlook for gold is one of further upside as the bullish trend is in place, following the reversal in December characterized by a double bottom. This was replicated again in March as the commodity broke through the 50 day moving average before the most recent tensions forced investors to look for a safe haven once more. We are now seeing what looks like a bullish consolidation in the price with resistance in at $1257, a break above here should put at least $1275 in play. The US NFP numbers on Friday did little to spur the USD and it seems that for now, rate hikes have been put on pause.

For now, Gold coils like a loaded spring, waiting for a catalyst to unleash itself as investors wait with baited breath as to which master will play their Queen first.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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