Political events around the world boosted the price of gold throughout 2016 as investors looked to navigate the uncertainty brought by populist movements in the UK and US. However, investors who think 2017 will offer a respite from all the political uncertainty might be mistaken.
To recap 2016, the June Brexit vote in the UK shocked markets and sent spot gold prices to more than $1,350 an ounce. Prices remained above $1,300 per ounce for the remainder of the summer before dropping slightly ahead of the US election. As it became clear Donald Trump was headed to the White House, gold prices popped to a high of around $1,330 per ounce.
But that was 2016. A survey of analysts conducted by Bloomberg forecast gold to peak around $1,600 per ounce in 2017. There are a few key factors that might make gold appealing in the year to come.
The political focus returns to Europe when the French head to the polls April 23 and the world will watch to see if the wave of populism that powered Brexit and Trump will continue. No candidate is expected to garner a majority of the votes, so a run-off election between the top two candidates is slated for May 7 and will likely feature Marine Le Pen of the conservative National Front Party. Le Pen has already introduced a plan to drop the euro and resurrect the franc; a concept that threatens the fabric of the eurozone and the stability of sovereign bond markets.
The results in France will also influence the outcome across the border when Germans hold elections September 24. Chancellor Angela Merkel has seen her approval ratings ebb and flow since the onset of the refugee crisis. However, a breakaway France with Le Pen at the helm could rattle voters’ confidence and force them to consider a more populist future for Germany.
The politics of France and Germany represent the kind of risks that stand to roil European governments, shake global financial markets and send investors fleeing to safer assets. However, investors are also starting to change what they view as “safe assets” in ways that stand to have profound implications for gold investors.
The election of Donald Trump and the tumult that has accompanied the early days of his administration have already had an effect on the US Treasury market. In November and December, Japanese investors modestly reduced their holdings of US Treasuries – the first time a reduction had happened in back-to-back months since early 2014. Meanwhile, China’s holdings of Treasuries recently reached a seven-year low and decreased more in 2016 than in any single year on record.
In an environment where political risks bombard the front pages of newspapers and websites across continents and historically safe assets such as US Treasuries are becoming suspect, precious metals like gold are poised to benefit from increased attention from investors looking for safety. If gold investors can time their moves well, the populist wave sweeping global politics could provide higher returns.