Still paying commissions on stock trades? Equities.com now offers 100% commission free stock trading and flat-fee options trading for $89.95/month! Get started today by https://www.www.equities.com/trading
The markets have been rallying following Trump’s win over Clinton during the Presidential election. The S&P 500 Index reached over $20 trillion in market cap for the first time ever, on February 13, 2017. Now, it seems the Trump trade is still on, and market participants have been betting on President Trump’s proposed tax cuts, which would stimulate the economy. Despite the potential tax reform and deregulations that could stimulate the economy, there is still some political risk on the table. Some still believe gold could be a safe haven, what with all the political and economic uncertainties in the US and Europe.
Could the Fed Affect Gold Prices?
Early on February 14, 2017, ahead of Fed Chair Janet Yellen’s speak at 10:00 AM ET, gold prices fell due to the rise in the US dollar and Treasury bonds. Moreover, the 2017 rate hike path, as implied by the Fed Funds futures prices, steepened. Consequently, this thwarted the appeal of gold as a safe haven. Now, some believed Federal Reserve Chair Yellen would continue with her cautious approach. According to BMO Capital Markets Deputy Chief Economist Michael Gregory , “I can’t see them playing the tightening card just yet.”
Additionally, senior economist at Jefferies in New York stated, “Nothing has popped up to spur the Fed into acting in one way or another.”
Jason Bond, a trader and mentor, said, “There has not been enough strong economic data in the US markets just yet to cause the Fed to raise rates. I still believe there are some political risks on the table, such as the first round of the French Presidential election in just over two months, which could boost gold prices and gold-related exchange-traded products”
Now, according to the FedWatch Tool, which is based on the CME Group 30-Day Fed Fund futures prices, which market participants tend to use to get an idea of the probability of a change in US monetary policy, indicated that there was over an 85% change the Fed would not raise rates in its March 2017 meeting.
Political Uncertainty Could Boost Gold
VanEck Australia’s Director of Investments and Portfolio Strategy Russel Chesler stated, “If there’s a way to measure uncertainty in the next four years, we would say it’s basically off the charts at this point in time… Over the last couple months, everybody’s become obsessed with Trump, his actions, statements and of course his tweets. We think this is going to continue. It’s an up-and-down ride and these risks are going to be positive for gold going forward.”
In addition to the potential US political risks, there are political risks in Europe as well. The first round of the French presidential election is just over two months away, and far-right presidential candidate Marine Le Pen has been calling for France to leave the Eurozone and give up the euro, which would be reminiscent of Brexit, if it does occur. Le Pen plans to replace the euro with a basket of new national currencies and retract central bank independence.
That being said, gold could get a boost from the political uncertainties in both the US and Europe.
The Bottom Line
The market is placing a “high” probability on the Fed leaving interest rates unchanged in March 2017, which could bolster gold prices. There are political uncertainties in both the US and Europe, and gold prices may see a rise in the coming months.