Gold had a satisfying first quarter, rising 9% since the beginning of the year. While that can be considered a good start, five events sprinkled throughout 2017 could send it much higher.
With Republicans winning the presidency and both houses of Congress, the gridlock that has plagued Washington since 2010 was sure to be broken. The scaling back of regulation and $1 trillion in fiscal stimulus would return the US to 4% annual growth.
While we’re only 11 weeks into proceedings under the Trump administration, it looks as if Washington’s arteries are still clogged by politics. With healthcare reform failing to even make it to a vote, the pressure is now on the GOP to see if they can push through tax reform and fiscal stimulus.
Given the healthcare debacle, there’s a real worry about their ability to do so. If the pro-growth policies aren’t passed, markets will likely come crashing back down to earth. This would create panic—and that’s good for gold.
There are several elections in Europe this year that could spell trouble for the future of the EU.
In the Netherlands, although populist candidate Geert Wilders and his Party for Freedom failed to win the election, they did come in second. As such, they may be able to force concessions on the EU from the winning party. Remember, British Prime Minister David Cameron was partly forced to call the Brexit referendum by the UK Independence Party, which only won a single seat in the 2015 election.
Next up is the French election on April 23. The latest polls have Marine Le Pen, leader of the National Front, tied for first place.
Then there’s Germany in September. Although the populist Alternative for Germany has gained in the polls, its chances of recording a victory are slim. Then again, pundits once thought the same about Donald Trump.
The real wildcard in Europe is Italy whose anti-euro Five Star Movement is leading by around 4 points in the polls. While an election doesn’t have to be held until May 2018, the three biggest political parties have called for one to take place this year.
As the continent continues to be shrouded in political uncertainty, gold will do well. If populists actually win, the yellow metal could take off as it did following 2016’s Brexit vote.
It’s no coincidence gold hit its all-time high of $1,896 per ounce amid the 2011 European sovereign debt crisis.
China’s domestic difficulties have been going on for a while, but it seems the situation has deteriorated further in the last few weeks.
The first quarter of 2017 was the worst-ever start to a year for defaults on corporate bonds in China. Seven companies defaulted on a total of nine bonds year to date, compared to a grand total of 29 for all of 2016.
As a result, bond yields are rising, which will likely lead to more defaults.
With a slowing economy and a total debt-to-GDP ratio of 277%, China’s issues won’t be easily fixed. As the world’s second-largest economy, China has accounted for over 30% of global growth since 2008, and a severe downturn would have global implications.
If the cracks become craters, there will likely be a shift into safe-haven assets like gold. Chinese investors and the central bank are already accumulating gold at a record pace. If the economy does crash, it will only accelerate this trend.
In 2016, Indian gold demand was the lowest since 2003. This was due to the shock of Prime Minister Narendra Modi’s demonetization in November, which brought gold imports to a standstill.
However, with imports for February up 175% year over year, the Indian gold market looks to be back on track.
With pent-up demand for gold plus wedding season in full swing, we should see strong buying over the coming months, which would support higher prices.
In fact, demand could be even higher this year as Indians are still reeling from the government’s move to eliminate 86% of the currency in circulation. Indians don’t trust banks with their money. As such, they are choosing to buy gold instead of keeping their money in an account.
Last week, President Zuma fired most of his cabinet and chose to replace them with close allies. On the news, the South African rand plunged to its lowest levels since December. The country’s credit rating was later downgraded to junk for the first time since 2000.
In February, the ruling party passed a bill that will expropriate more land from white farmers, without compensation. With rising political and social tensions, unrest could break out anytime.
This matters to gold investors because South Africa is the world’s sixth-largest producer and the fourth-largest exporter of the precious metal.
There are already calls for Zuma to step aside, and social tensions are running high, so anything from a civil war to a political revolt could happen. That, in turn, would cause labor disruptions—and any disruption to gold mines would negatively affect supply.
Economics 101 tells us if supply takes a hit and demand stays the same, prices will rise.
If the aforementioned events come to fruition, it will likely create uncertainty and panic… and that’s good for gold. Therefore, now could be an excellent time to add some bullion to your portfolio.
As gold is known as crisis insurance, doing so buys you protection from the fallout of these events. Along with serving as insurance, it could be an excellent investment given today’s low prices. – Stephen McBride
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