Spike in Gold Price Spurred by Weaker Greenback
How Wall Street Politics Affects Main Street Economics in the UK
The United States may be an ocean and a presidential circus away from the United Kingdom, but its impact on UK financial markets is profound. Just days after FBI director James Comey announced that he was reopening his investigation into Hillary Clinton’s email saga, the polls have swung dramatically. Donald Trump, the GOP contender for President is now at 45.5%, while Hillary Clinton has plunged to 47.2%.
Wall Street favours the stability that three decades of Clinton’s experience brings to the Oval Office. However, that lead has all but evaporated with the latest polling from Real Clear Politics. With just several days to go before the next US President is elected, pundits believe this race is on a knife edge. The importance of the US presidential election spans far and wide, well beyond the borders of the United States. As one of its closest allies and most important trading partners, the United Kingdom is especially vulnerable to volatility in US markets.
FTSE 100 index Driven Lower
On Wednesday, 2 November 2016, the FTSE 100 index was trading at 6,862.41, down 54.73 points or 0.80%. Much the same is true of all other European indices including the CAC 40, the Ibex 35, the Euro Stoxx 50, and the DAX. In fact, the only Asian index that was up on the day was the MSCI AC Asia Pacific index which gained 0.38% to close at 139.56. The Nikkei 225, the Hang Seng index and the CSI 300 all plunged as Hillary’s lead was sliced and diced by a resurgent Donald Trump.
The VIX (volatility index) in the US surged, and this drove equity prices are lower. A natural consequence of plunging equity prices and a weaker USD is a heightened demand for gold. Now, analysts across the UK are anticipating that the gold price could hit levels it has not seen for 3 years. Gold recently tested the $1,300 per ounce resistance level, and has made strong gains this week. Commodity traders are expecting volatility to remain at high levels through the week culminating in the election of a new US President on November 8, 2016.
Greenback falls and GBP rises as traders rush for gold
UK traders anticipate that gold could hit $1,400 an ounce by the end of the year if Hillary Clinton wins. This is due to her massive fiscal spending programme plans. If the Democrats make a clean sweep of Congress and the Senate, this is all but assured. However, gold could rise at least $130 an ounce if Donald Trump wins the presidency. This bullish sentiment is driven by the uncertainty that Donald Trump brings to the Oval Office. He is seen as a disrupter in chief, and he plans to upend many existing trade policies, redo the immigration system and renegotiate foreign policy alliances.
Sterling Shines as Dollar Declines
As such, both Clinton and Trump will be good for gold, but from different angles. In any event, gold bullion prices typically underperform when administration changes do not take place. This has been observed in 22 elections over the past 88 years. Meanwhile, the GBP/USD currency pair is trading at 1.2299, up 0.4538% or $0.0059. The sterling has advanced sharply over the past 5 days, gaining 0.66% against the greenback.
Part of the reason why the FTSE 100 index is lower is the appreciation of the GBP. Since 75% of listed stocks on the FTSE 100 index are overseas-based. These repatriated earnings result in lower share prices in the UK. But the big winner for day traders is gold bullion. It is well above $1,280 per ounce, and it has some ways to go before it fully recovers from the sharp losses it took in recent weeks.
The current resistance level appears to be $1,300 an ounce, but that will soon be broached if Hillary Clinton breaks free of Donald Trump. Silver is likewise trading higher and is priced at approximately $18 per ounce and will soon be testing the next resistance level at $18.50. UK traders will also be focusing their attention on the UK court ruling on Article 50 of the Lisbon Treaty on Thursday, 3 November 2016. Now that Mark Carney has decided to retire in 2019, financial markets have stabilised and the GBP is on the advance.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.