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LAWRIE WILLIAMS: Gold: A play on the Fed and the UK election?

We could see more election shockwaves hit the market as the UK goes to the polls in under a week’s time.  What had seemed to be a foregone conclusion that Theresa May’s Conservative Party (considered to be on the right) would end up with a substantially increased number of seats in Parliament is now very much in doubt.  The momentum at the moment appears to be with the much-maligned Jeremy Corbyn’s left-wing Labour Party which has been inexorably been closing the gap, with a populist, largely- socialist, manifesto, although its full implementation would inevitably lead to some massive tax increases.

When the election was called Jeremy Corbyn and his party were largely deemed unelectable, but he and most of his proposed slate of ministers have performed better in the election runup than their Conservative ministerial counterparts.  A recent opinion poll by one of the biggest polling companies, YouGov, predicted that the Conservatives would actually both lose seats and their absolute majority in Parliament – hardly an ideal situation for a country about to enter serious negotiations over its withdrawal from the European Union.  This recent poll knocked the pound sterling back sharply against the dollar and while it did not lead to a rise in the price of gold in dollar terms, it certainly did in sterling.

Meanwhile, the UK election will be followed in a matter of days with the next FOMC meeting in the USA when it had been widely expected that the U.S. Fed would confirm another 25 basis point rise in interest rates.  While the gold price in US dollars had so far been holding up pretty well in the face of another interest rates rise, as the fateful day approaches we could see it knocked back a few percentage points as it has been with every Fed rate rise to date.  But, jobs figures out today came in well below expectations and the previous two months figures were also sharply downgraded raising doubts as to whether there will indeed be a rate increase announced at the FOMC meeting – which is due to take place on June 13th and 14th.  Whatever the Fed decides, rising inflation will keep rates negative in real terms which will be a positive factor for the gold bulls and could well suggest a further recovery in the gold price even if rates are raised, as we have been seeing following past Fed rate increases.

So where does this leave us.  Should the Fed fail to raise rates at the June meeting AND the ruling Conservative party face a setback in the UK elections, which now looks possible unless they can make a good recovery in the remaining few days up until the polling date – next Thursday (June 8th) then we think gold could well test the $1,300 level again.  Safe haven buying would be back on the agenda, particularly in the UK, while the abilities of the COMEX paper gold market to continue to keep the gold price down are reducing the whole time as Shanghai, more and more calls the tune as the world’s biggest physical gold market.  But then perhaps it is in China’s interests to suppress the gold price until its gold ownership targets are reached (See: So who is really manipulating the gold price?).  To make money in gold one needs to guess correctly what the really big players are doing.  

02 Jun 2017 | Categories: Gold

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