Over the weekend, the Swiss voters rejected the campaign to radically alter banking system, while President Trump withdrew his support for the joint statement of G7 and arrived in Singapore for a historic summit with North Korean leader Kim Jong Un. The Fed and the ECB are expected to tighten their monetary policy in tandem. It will be a hot period for the markets. Will gold blaze?
Switzerland Won’t Adopt Sovereign Money
Swiss people are skeptical about the soundness of the current monetary policy. A little under four years ago, they held a referendum for the Swiss Gold Initiative requiring the central bank to increase its gold reserves up to 20 percent. And on Sunday they held another referendum for the Sovereign Money Initiative banning commercial banks from creating money (we have already analyzed its economic effects in 2016). The voters rejected overwhelmingly both initiatives (about 75 percent of people rejected the SMI), but given the complexity of the matter and the status-quo bias, it is not a bad outcome. Hence, nothing has changed so far – but after the next financial crisis the initiative could be resurrected and could gain more support.
Trump Surprises at G7 Summit
Switzerland did not shake the financial markets. The summit of the Group of Seven was more interesting, as Trump rejected the joint communiqué initially agreed between the leaders and fired a series of angry tweets criticizing U.S. allies and Canadian Prime Minister Justin Trudeau personally (Trump called him “very dishonest and weak”). The unresolved trade issues and conflicts within the G7 should support the safe-haven demand for gold. However, Trump’s actions are often only a theater with aim to gain the negotiation advantage. After all, he has recently proposed to end all tariffs and trade barriers between the U.S. and its G7 allies. “We should at least consider no tariffs, no barriers — scrapping all of it”, he said during the summit. Such a twist could withdraw some safe-haven demand from gold.
When Trump Meets Kim
Although turbulent, it was the summit within the Western allies, which should not affect the long-term close relationships (at least we hope so). But today Trump will meet with North Korean leader Kim Jong Un. It’s historical summit which could lay the groundwork for ending a nuclear stand-off. As a reminder, leaders of North Korea and the U.S. have never met previously since the 1950-53 Korean War. What should we expect from the summit? Well, it’s hard to predict how the meeting will end. Both leaders are quite, well, unpredictable. We bet that it will go fine, as both leaders have a lot to gain. Actually, the summit is the success itself. So the price of gold could drop after the summit due to the eased tensions between both countries. Unless, of course, Trump leaves the meeting early, as he did in case of the G7 summit in Canada. Then, the uncertainty should rise, boosting the gold prices.
Will Fed and ECB Tighten in Tandem?
However, geopolitical concerns often have only limited and short-lived impact on the price of gold. Central banks’ actions can overshadow other factors. On Wednesday, the Fed will release its monetary policy statement, which will be followed by the ECB’s message on Thursday. As a reminder, the Fed is almost certain to hike the federal funds rate again, while the ECB is expected to signal that its quantitative easing will end this year. Tightening policy by the world’s top central banks just one day apart will signal confidence in global economic growth, which could diminish gold’s appeal as a safe-haven asset. However, the Fed and ECB language will be crucial. We expect that the Fed is likely to sound more hawkish, given the U.S. fiscal stimulus, political uncertainty in Italy and very cautious ECB’s approach. It might be the case that Draghi will wait until the next policy meeting in July with the final decision or more details. Hence, the dollar may appreciate after the both central banks’ meeting, which should be negative for the gold market.
Implications for Gold
Many interesting things happened over the weekend. And even more are to come this week. So it might be a volatile period in the gold market with many potential drivers affecting the price of the yellow metal. If the summit between Trump and Kim Jong Un goes well, and the Fed sounds more hawkish than expected (or the ECB sounds more dovish) the gold prices should get burned. On the other hand, the Fed’s potential for further hikes is limited, while the ECB is just beginning to tighten its monetary policy – it could support the euro (and gold) against the greenback. One thing is certain: after this week, we should have a more clear gold market outlook for the second half of 2018. Stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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