GOLD: AN ASSET IN ALL SITUATIONS

Gold has an uncanny knack of surprising the market purists. 2017 is no different. The markets had factored in a bearish drive for the bullion into 2017 given the events of late 2016. But, a turnaround was right around the corner. Gold is considered an alternative form of investment or a safe haven instrument. Even in uncertain times, trust in gold for an appreciable return. Gold, having begun 2017 at $ 1150.33 per troy ounce, has recorded three consecutive months of positive returns. The price inclined by 12% to attain the highest price of $1288.53 per troy ounce on 13 April 2017. With geopolitical tensions serving as catalyst, the bullion benefitted as a result. While this may be considered a good start, the gold faithful are looking at four other events which could further push prices higher throughout 2017. Shutdown in Washington Along with Donald Trump winning the US elections, the Republicans also won both houses of Congress. Since 2010, the gridlock that had affected Washington was sure to be broken. Analysts opine that the fiscal stimulus program would spur the US economy annual growth rate back to 4%. Trump’s positioning of power has come under much scrutiny and every decision has pundits scratching their heads. While healthcare reform failing to make it to a vote, the pressure is now on the GOP to see if they can push through tax reforms and fiscal stimulus. But given the debacle of healthcare efforts, there is slim chance for these programs only to come through unscathed. Likewise, if the pro-growth policies fail to materialise, markets will likely come down creating panic. And when markets press the panic button, enters gold. Elections in EU Nations 2016 was highlighted by the BREXIT referendum and its effects spreading throughout the European Union. There are several elections in Europe this year which could further spell doom for the future of the EU as one single entity. Although, Geert Wilders and his Party for Freedom stood second in the Netherlands elections, they may be able to force concessions on the EU from the winning party. In France, where the elections are scheduled to be held on 23 April, Marine Le Pen, leader of the National Front is tied for the first position according to the latest polls. Germany, the largest economy of EU, will have its elections in September. Although the populist alternative for Germany has gained in the polls, it chances for victory are very slim. Then again, how wrong were we when the US went for elections and Mr. Trump. However, most eyes are on Italy whose anti-euro Five Star Movement is leading by around 4 points in the polls. While the election has been slated for May 2018, the three largest political parties have called for it in 2017. The European Union continues to be clouded by political uncertainty which bodes well for gold. And if the elections throw in a surprising result, the yellow metal could take off as it did following the result of the Britain referendum last year. Return of the Indian Demand The gold demand from India in 2016 was the lowest since 2003. This was attributed to the shock decision of demonetisation by PM Narendra Modi which brought imports of gold to a standstill. In 2017, the Indian gold market looks back on track with imports for February surging by 175% year-on-year. The demand is driven mainly by the wedding season which covers the coming months. The demand from the Indian market could be even higher this year as Indians are still feeling the effects of the move from the government to eliminate 86% of the currency under circulation. As a result, Indians do not trust placing their money with the banks. Instead, they have shifted their interest to buying gold. Unrest in South Africa A few days back, the President of South Africa, Jacob Zuma, fired most of his cabinet members and chose to replace them with close allies. On the back of the news, the South African currency Rand slipped to its lowest since December. The nation’s credit rating was later downgraded to junk for the first time since 2000. The ruling party passed a bill that will confiscate more land from white farmers without any compensation. This could trigger an unrest of humongous proportions sooner rather than later. Calls are also streaming in for Zuma to step aside so a political turbulent environment could evolve. Likewise, labour disruptions could erupt in the gold mines disrupting supply. The traders of gold are keeping a close eye on the developments from South Africa because the nation is the sixth-largest producer and fourth-largest exporter of the bullion. Economic theory tells us that if the supply is disrupted keeping the demand constant, prices will rise. If the aforementioned events occur, it will likely create an uncertain situation. And when there is uncertainty in abundance, gold prices could skyrocket. Gold is often coined as the ‘asset for all crisis situations’ since buying the yellow metal buys you protection from the fallout of these events.

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Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]