The markets hate uncertainty with a few exceptions. Gold is one of these assets that thrive on it. The yellow metal is up over 25% so far for 2016 making it one of the best performing asset classes anywhere. This does not mean that the ultimate safe haven vehicle has no more room to run. With its all time highs from 2011 still 40% away, there could be more significantly more upside yet to come. Look at some of the uncertainties that continue to underpin gold for this year and the foreseeable future.
Threats to Free Trade
Just this last week, the German Vice Chancellor asserted that the TTIP (Transatlantic Trade and Investment Partnership) U.S. and European Union free trade agreement is dead. French President Hollande has also said that France is prepared to walk away from the negotiations based on their unhappiness with U.S. demands that favor American interests over European ones.
Add to this the TPP (Trans Pacific Partnership) that is heavily opposed in congress by both Republicans and Democrats. Even competing Presidential candidates Republic Donald Trump and Democrat Hillary Clinton both oppose the deal and have promised to kill it. Opposition to and uncertainty in free trade agreements is supportive for gold.
Upcoming Elections in the U.S. and Europe
Markets hate uncertainty in elections while this all benefits gold. Recent election polls in the U.S. demonstrate that the American election contest is now at a statistical dead even. An unknown election result is not good for businesses to move ahead on investments in employment, technology, or infrastructure. Instead they move resources into defensive positions in uncertain times like these.
It is not just the U.S. election this year that is impacting world markets and safe haven demand either. Based on current polls, French elections in 2017 could also see anti establishment anti globalization candidate Marie Le Pen come to power in France. Even Angela Merkel the over decade long leader of Germany and de facto power behind the European Union has suffered a humiliating local election defeat in her home state this past weekend. Her party similarly came in behind the anti establishment movement. The EU most critically needs strong and certain prospects for its leadership amid its continuing economic slowdown and ongoing migrant crisis. Early indications like those in Germany and France point to more political uncertainty the rest of this year, next year, and even the year beyond (in Germany).
Uncertain Effects of Negative Interest Rates
Negative interest rates are a new phenomenon. Their consequences have not yet been tested. Almost 500 million individuals now live in nations that boast negative interest rate policies. These countries’ economies combined equate to almost 25% of worldwide GDP. From Japan to the European Union, the world’s central banking club has started down a path into the unknown world of sub zero interest rates from desperation and a last ditched attempt to kick start their slow and debt laden economies. No one can really say what the end game will be. This pushes retail and institutional investors alike into the yellow metal and likely will for several more years.
Likelihood of U.S. Recession Before Monetary Policy is Normal
If the Fed is extremely fortunate, they may be able to raise rates one time for all of 2016. This is after having tried repeatedly throughout the year. The August job and U.S. services sector data both disappointed in the last week, putting an end to hopes for a September increase. Most analysts are waiting on the December meeting to be the one where it actually happens. This of course depends on what happens with U.S. elections and other unknown geopolitical and economic events in the meanwhile. The rates in the .25% – .5% range are almost zero now. At the rate the Fed is going with one interest hike last December and possibly this December, it would take years for them to get rates back up to levels where they have some ammunition for the next recession or financial crisis.
The problem is that the U.S. economic expansion cycles typically only last 69.5 months before they slide into recession. The American economy has been in this limited recovery expansion mode for 87 months already. The next recession could erupt at any time, and weak economic data lately is not an encouraging sign. No one knows exactly how the Fed will react when this next recession starts if they have no conventional tools left. If the European Union and Japan are any guide, it will be with negative interest rates, more printed money, and quantitative easing. All of this economic policy uncertainty could be with us and supporting gold for some time to come.
Eventual Effects of Brexit and Other EU Dropouts
A last consideration is what the final effect of the Brexit process will mean for the European economies and the world markets as a whole. So far the results have been manageable and even less serious than predicted. Yet as Bank of England Governor Mark Carney has pointed out, the process has not yet really begun and will take years to finish. Add to this the rising risk of contagion in the form of another European nation’s populace electing to leave the world’s largest economic block. Current polls show a vote held in France today would make a Frexit more likely than the Brexit one was. Similar polls are showing up in the Netherlands and Denmark. The reasons to buy gold go on and on and are not likely to disappear any time soon.