Gold prices slipped in mid-October, pressured by a stronger dollar as prospects faded for a new economic stimulus deal before the November 3 presidential election in the United States.
The dollar’s appeal to investors as a safe haven during the pandemic has grown, and has made dollar-denominated gold more expensive to savers and investors holding other currencies.
The U.S. administration and Democratic lawmakers struggled to make progress on a fiscal relief package to tackle the economic impact of the pandemic, driving investors into the safety of the dollar.
While the presidential election result in the U.S. may be driving additional uncertainty (probably good for gold) in the markets, the current stimulus impasse almost certainly means that once the result is behind us the U.S. government of whichever hue and the Fed (central bank) will unleash a massive new stimulus package designed to drag the U.S. out of the current COVID-related economic mire,” wrote Lawrie Williams, gold market commentator for bullion dealer Sharps Pixley.
Gold prices have risen by more than 24 percent in 2020, as investors and savers flocked to the precious metal due to uncertainty over the global economic impact of COVID-19.
Gold has retreated from a record high above $2,000 per ounce touched in August, and was at $1,894.55 per ounce, down 0.25 percent, on October 15.
For UK-based gold savers, the pound faced downward pressure against the dollar due to recent difficulties of negotiators to make progress in Brexit trade talks between the EU and the UK.
Some investors believe that even if a trade deal is reached this year, it will be a limited one, which could weigh further on the pound.
However, if a strong deal emerges, contrary to expectations, sterling could rally against the dollar, possibly reducing the cost for savers to acquire gold.
Market watchers are talking of the possibility that the Bank of England may act soon to trim interest rates into negative territory for the first time in history.
As gold has zero yield, then it would potentially look like an increasingly attractive asset class relative to cash as savers, in theory at least, may have to pay banks to hold money in a negative interest rate environment.
Negative interest rates would also likely weigh on the pound exchange rate against the dollar, and boost UK share values as many companies in the FTSE-100 are exporters and will benefit from a softer sterling.
So if the Bank of England does decide to ease interest rates below zero, UK savers could take the view that gold effectively offers a better return than cash
Frequently asked questions
Why did gold prices fall in mid-October?
Gold prices slipped in mid-October primarily because they were pressured by a stronger US dollar. This strengthening of the dollar occurred as prospects began to fade for a new economic stimulus deal in the United States before the presidential election on November 3.
As the US administration and Democratic lawmakers struggled to make any progress on a fiscal relief package to address the economic fallout of the pandemic, investors turned to the safety of the greenback. This growing appeal of the US dollar as a safe-haven asset during the pandemic has made dollar-denominated gold more expensive for savers and investors who are holding other global currencies, consequently dampening the demand and pushing gold prices down.
What is the expected long-term impact of the US presidential election on gold?
While the immediate lead-up to the US presidential election has created market uncertainty, which is generally positive for gold, the long-term outlook remains strong due to expected stimulus measures. Industry commentators note that the current political impasse over financial relief is likely a temporary delay.
Once the election results are finalised, the US government and the Federal Reserve are highly expected to unleash a massive new economic stimulus package. This substantial injection of capital is designed to pull the United States out of its current COVID-19-related economic difficulties. Such large-scale monetary easing and fiscal stimulus are traditionally seen as highly supportive of gold prices over the longer term.
How did gold perform overall in 2020 compared to its peak?
Gold performed incredibly well overall in 2020, with prices rising by more than 24 per cent over the course of the year. This dramatic upward trend was driven by savers and investors flocking to the precious metal as a safe harbour amid widespread global economic uncertainty caused by the COVID-19 pandemic.
Despite this impressive annual growth, the price of gold did retreat from its historic record high. After touching an all-time peak of more than $2,000 per ounce in August 2020, the price eased back slightly. By mid-October, specifically on 15 October, the price of gold had settled at $1,894.55 per ounce, representing a minor daily drop of 0.25 per cent.
In what way are Brexit negotiations affecting British gold buyers?
Brexit negotiations affect UK-based gold buyers primarily through their impact on the sterling-to-dollar exchange rate. Because gold is priced globally in US dollars, the purchasing power of the pound sterling directly dictates how affordable gold is for British buyers.
Difficulties faced by negotiators in making progress on trade talks between the UK and the EU have put downward pressure on the pound. Many investors believe any final deal will be limited, which could weaken the pound further and make gold more expensive. Conversely, if an unexpectedly strong trade deal is secured, the pound could rally against the dollar, lowering the acquisition cost of gold for UK savers.
Why does a negative interest rate policy make gold more appealing?
A negative interest rate policy increases the appeal of gold because gold becomes a more attractive asset class compared to holding cash. Typically, the main drawback of gold is that it yields zero interest, unlike savings accounts.
However, if the Bank of England trims interest rates below zero, savers could theoretically have to pay commercial banks to hold their cash. In this negative interest rate environment, gold effectively offers a better return than cash. Furthermore, negative rates would likely weaken the pound against the dollar and boost UK share values for exporters, prompting British savers to view gold as a highly defensive and stable store of value.
