Few could have predicted how turbulent a year 2020 would prove to be, but fortunately for those investing in gold, the trials and tribulations have simply strengthened the bull market in precious metals. In the United States, a controversial US President has faced the fight of his life in the midst of a serious public health crisis.
Meanwhile, the UK has been contending with this same public health crisis in its own way, whilst battling to bring a firm resolution to the Brexit saga once and for all. These factors have dampened confidence during the year, helping keep gold prices close to record highs.
But what could happen next, now the US Presidential election is over, and what could help push gold higher?
Polarisation at new highs
Markets typically crave certainty - during a US Presidential election year, markets tend to respond positively to some form of continuity. This could mean an incumbent returning for a second and final term, or there being a smooth transition process, if the incumbent party finds it has lost the White House.
While Joe Biden may have clinched 306 electoral college votes, more than enough to clear the 270 they needed to win the US election, a smooth transition is proving tricky to ensure. The US is in the grip of a third wave of COVID-19, and the US economy is likely to feel the effects of that in the form of weak growth by year’s end.
President Trump has broken with predecessors in failing to concede the election, while allowing a transition to occur - all despite the electoral maths pointing to a clear victory for Mr Biden. Instead of giving markets reassurances of a smooth transition, Mr Trump has delivered fresh doses of uncertainty, circulating unsubstantiated conspiracy theories, suggesting the election was rigged.
As COVID-19 cases continue to soar, President Trump is also reported to be sitting on attempts to give Mr Biden’s team access to the necessary resources needed to fight the pandemic. Mr Biden went as far as to say that “more could die”, if President Trump fails to relent in blocking the transition process from getting underway properly.
The UK faces problems of its own
Political turmoil in the US pales into comparison with the UK’s situation. The country faces its second wave of COVID-19 cases after a brief lull in the summer, and England is now emerging from a second major lockdown, which may dent economic growth in the fourth quarter of the year.
Added to this is the strain to deliver a resolution to the Brexit saga which has distracted and hamstrung the UK’s political establishment since the EU referendum in June 2016. Gold investors in the UK have benefited immensely from the uncertainty generated by Brexit. Before the referendum, gold prices sat at £700 per troy ounce. At the time of writing, prices are closer to £1,475 per troy ounce.
This effective doubling in just five years reflects the strength of gold coupled with immense weakness in sterling over many years. In the latest twists and turns of the Brexit story, it is understood that a pivotal vote in the European Parliament on Brexit has been postponed until 28th December 2020. This delay means the UK risks going right up until the last three days of its Brexit transition period before a possible resolution can be assured.
If Downing Street is unable to negotiate an effective outcome to the situation with European leaders in a timely way, this is guaranteed to roil markets.
Unprecedented stimulus weakens currencies
The pound is not only suffering as a result of this ‘Brexit effect’, but it is also under pressure domestically from the UK’s very own central bank. The Bank of England is intentionally trying to push the pound down through a policy called quantitative easing (QE), where it digitally creates tens of billions of pounds overnight, to buy government bonds.
These extra pounds are expected to circulate into the economy at some point, bringing the unit value of each pound lower in the process, generating higher inflation in the long term. Gold has traditionally been more bullish during times of high inflation, so the fresh rounds of QE announced in recent weeks could be just the ammunition needed to spur a sustained bull market for the time being.
Gold prices remain elevated, as markets await the outcome of Brexit and digest the events following the US Presidential election. The transition period between two new administrations of different parties can often be a nerve-wracking experience for traders, especially if the incoming administration offers a radically different economic approach to its predecessor.
Both the UK and the US are using QE in unprecedented amounts to stave off a deflationary spiral, which has the effect of perpetuating an economic climate of easy money, cheap borrowing and higher inflation expectations.
Gold could remain resilient in 2021
Just as the COVID-19 pandemic was beginning to rattle markets in April, Bank of America published a forecast for gold prices over an 18-month period up to October 2021. In its forecast, the financial institution expected gold to hit $3,000 per troy ounce by the end of the projection. If exchange rates between the US dollar and the pound were to stay steady from now until 2021, this could mean a gold price equivalent to roughly £2,400.
This indicates prices could almost effectively double if Bank of America’s projections are correct, giving investors all the more reason to consider adding gold to their portfolios in the next 12 months. If you wish to buy bullion or simply wish to speak to experts in the field of precious metals, the Gold Bullion Company is the best place to start.
By calling 01902 623 259 or getting in touch through other routes via our Contact page, you will be put in touch with a member of our hard-working team at our offices in Wolverhampton. For health and safety reasons, meetings in person at our offices are by appointment only for the time being.
Our team can help answer any questions you may have or facilitate the online sale of bullion in an efficient way, to help you join hundreds of thousands of investors across the UK today.
