ETF Securities Research Blog

Recent events highlight investor’s appetite for safe havens

In the run up to a FED rate hike gold prices are typically weak, but so far this year gold has risen 12%, with one rate hike already and likely another next week. This year gold ETPs have globally seen inflows of US$4.6bn, only one quarter of what was seen in 2016 but in some ways these inflows are surprising given the threat of further rate hikes.

The primary reason why gold has been supported is most likely due to political risk. First the Dutch elections, then French elections, both where there were worries of extreme right parties gaining power who could destabilise the European Union. Then, after the initial euphoria of Donald Trump becoming president, investors are concerned over his undiplomatic approach and his increasing isolation in Washington, issues which are now well known.

The recent significant uptick in gold has most likely been due to a confluence of events in the coming week, including:

  • The ongoing Saudi/Qatari border closure
  • Fired FBI Director James Comey’s testimony on 8th June
  • The ECB decision on 8th June, inflation expectations are not “well anchored” anymore, tapering maybe discussed
  • The UK election results likely early on 9th June where polls have tightened considerably
  • The Federal Reserve rate decision on 14th June where interest rates are expected to rise
  • The Greek debt announcement on 15th June, if no agreement there is a risk of a Greek default

We expect these events unfurl in a market friendly manner and the recent gold price strength to cool in coming months. Gold maybe close to be peaking, but clearly, as demonstrated by inflows, investors see it not as a capital appreciation story but an event risk hedge, with any of these events have the potential to destabilise equity markets.

Gold events
In the longer term, there remain concerns over the Italian election, the uncertainty surrounding the unwinding of unprecedented easy monetary policy and likely ongoing US political uncertainty, implying gold will continue to be used as an event risk hedge.

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