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Gold Price: November Market Swings

Thursday, November 29, 2018

The gold price has seen a certain amount of fluctuation over the last few weeks, with a considerable amount of upturn since October that analysts believe is the result of concerns over the health of the global economy.

While the overall market seems to be drifting sideways, it is likely that the growing threat of weaker global economic growth, the resulting economic – and political – uncertainty in Europe of Brexit, and the US mid-term elections have all played a part in gold’s market value.

As you’ll already know, gold represents a safe-haven asset that many investors look to in times of turmoil or crisis. And this could well be the reason that precious metal has sustained a moderate price recently. But have the events over the last few months been sufficient to warrant public interest in any potentially record-breaking highs or lows for the gold price? Not really.

Equally, with a Brexit situation yet to be completely finalised, we haven’t seen the full effect of the recent political events just yet. So we may witness some interesting changes to come in the gold market moving into 2019. Let’s take a closer look at how major world events have impacted gold lately.

Brexit, a potential leadership challenge and the unknown

Since striking a deal with the EU, Theresa May has faced tough times trying to convince the UK that her version of the much anticipated Brexit deal was the one everyone should back. In fact, she found it hard enough convincing her own party who have issued multiple no-confidence letters with several ministers even resigning, including her Brexit minister.

May, nevertheless, has pledged to keep pushing forward with her deal and warns that removing her from the position as PM will only weaken any chance the UK has in coming out with a deal that won’t completely derail the economy.

Similar to the last few months, it’s the fear of the unknown that poses the greatest risk to the UK economy. Various industries such as the automotive sector have warned that a bad deal, or no deal, could have disastrous consequences for the nation.

More than two years after the United Kingdom voted to leave the EU, it is still unclear how exactly things will end. Whether May’s deal is a “botched, worst-of-all-worlds deal which is bad for Britain,” as opposition Labour leader Jeremy Corbyn said speaking at the CBI conference, or if this is really the best the UK will get, is something we just can’t answer right now.

But what we do know is that instability such as this usually has the effect of increasing investments in the gold market as investors look to this stable asset as a way to buffer the impact of economic turmoil – as we may see in European markets following Brexit. But is this a serious geopolitical factor for the world marketplace? We’re eager to see.

US stability following mid-terms

Across the pond, things are looking a lot less choppy following the recent midterm elections. Following a dramatic election night, President Donald Trump's Republican Party was able to retain control of the Senate while the Democrats took control of the House of Representatives.

Despite the lively affair, many economists believe the outcome of the US mid-term elections is good news for the US and world economies. Chief among the reasons is the fact that Trump has come out relatively triumphant, avoiding embarrassment by increasing the Republican majority in the Senate.

So what we’re seeing is not a political shift or disruption of serious proportions, but a stable outcome where a strong US economy can continue to operate under a business as usual mentality. Trump’s willingness to communicate with foreign trading superpowers over deals also suggests a better outward-looking economic approach that could benefit the US.

Mining deeper, there may be further cracks and emerging situations to watch, but where gold is concerned, there usually has to be a significant change in the US dollar for there to be any large increase in the gold price.

UK base rate rise and US Fed rate hike

Between 2009 and 2016, UK interest rates remained consistent at 0.5 per cent, following their drastic cut after the financial crisis. The recent rise earlier this year, however, could indicate the Bank of England’s level of trust in the economy, as well as a potential sign of further interest rate rises in years to come.

In the US, the US Federal Reserve raised interest rates by 25 basis points, which is the highest recorded since April 2008. This is part of the Federal Reserve’s target to slowly normalize interest rates over time.

What does this mean for gold? Probably not that much, but let’s take a look anyway. Many investors believe that higher interest rates typically have the effect of driving the price of gold down. This is because as interest rates rise, and bonds and other investment options with high yields become more attractive, gold becomes less popular.

Despite the popular belief of a strong negative correlation between interest rates and the price of gold, a long-term review reveals this relationship isn’t so obvious. While this may well be a contributing factor to a drop in the gold price from time to time when combined with other market activities, it’s probably not the best signal that you should be preparing to sell all your gold before the price drops.

What does The World Gold Council say?

In their Q3 report on the gold market, The World Gold Council highlighted a few interesting facts about the market and recent trends that have taken place.

Recent stock market volatility and currency weakness were said to boost demand in many emerging markets and interestingly, China, the world’s largest gold bar and coin market, saw demand for these items rise 25 per cent year on year since 2017.

Q3 jewellery demand saw a price-led year on year growth of six per cent and the WGC also noted that lower gold prices during July and August encouraged bargain hunting amongst price-sensitive consumers. This is a trend that might follow if political and economic stability ensues in 2019 as more certainty over the Brexit deal and a strengthened US economy potentially have a negative effect on the gold price.

Final word

So all in all, the outcome of the mid-terms, recent developments over Brexit and the other world market factors seem to have only moderately impacted the gold price of late.

We’ve certainly seen some interesting upturns week to week over October and November, but the general direction seems to be sideways at the moment. And through a macro lens, we’re a long way from the price spike we saw earlier in the year.

You can track the gold price on our market reports here and keep an eye on our news feed for the latest updates on the swings in the market that could affect your investment opportunities in gold bullion and gold coins.