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Investors Were Eyeing Gold Ahead of UK Elections

 

June 27, 2017 (Investorideas.com Newswire) Britons went to the polls on Thursday, June 8, 2017 to elect a Prime Minister. Leading UK banks and financial institutions do not expect too many surprises heading into this election. Gold is currently trading at $1,279.64 per ounce, up 0.22% or $2.84. The precious metal tends to rally with increasing geopolitical uncertainty and volatility. The UK elections and terror attacks have rocked financial markets and made gold a priority for many investors. HSBC Holdings PLC analysts believe that there are only 3 likely outcomes: A Conservative victory without an absolute majority, a Conservative victory with an absolute majority, or a surprise Labour victory.

Outcomes-Based Trading

In the first case, it is possible that a hung parliament will result. This may initially upset the equilibrium in financial markets and lead to a short-term reversal with the GBP. In the event of a hung parliament, Prime Minister May will remain in office until a new government is formed. The second scenario is a Conservative victory with an absolute majority. In this case, financial markets will stabilize, and the corporate sector will flourish on expectations of lower tax rates. Depending on which way, Prime Minister May goes - a hard Brexit or a soft Brexit - the GBP, the FTSE 100 index and the FTSE 250 index will move accordingly. The final possibility is an unlikely Labour victory. In this case, the GBP may weaken, but the UK would likely endure a soft Brexit.

Leading CFD trading options experts have seen a marked increase in call options on gold. Net long positions increased after the terror attacks hit London and surrounds. The uncertainty is expected to continue throughout the week, culminating on election day on Thursday, 8 June. Any further terror attacks, or surprises in the YouGov polling data will naturally push traders towards gold. The GBP is expected to trade in a tight range for the remainder of the week against the USD, EUR, and JPY. Currently, the GBP/USD pair is at 1.2918 (+0.28%) or $0.0036. The GBP/EUR is trading 0.52% higher at 1.1477, up €0.0059. Bullish sentiment around the GBP is largely the result of strong economic data releases. That could all turn on a proverbial dime if an upset election result or another terror attack takes place.

Gold Trading Turns Bullish Once Again

The precious metal is up 4.25% over the past 30 days, and 8.76%, or $102.80 per ounce, over the past 6 months. There is no doubt that gold is rallying on the back of multiple terror attacks that hit London over the weekend. That, coupled with the uncertainty of outcomes in UK general elections is helping to fuel the current gold rally. However, there are several other factors driving traders to gold. These include a slightly weaker US dollar which typically raises gold prices. Hedge purchases of gold are evident with net long positions on the precious metal with August Comex gold futures. The gold price reflects these changes. As far as support and resistance levels go, the current support level is $1217.80 and the resistance level remains around $1,300 per ounce.

Supporting rising gold prices is weak nonfarm payrolls data from the US. There are now growing concerns about the likelihood of a Fed FOMC rate hike on Wednesday, June 14, 2017. With the US economy reflecting mixed fortunes, now may not be the right time to increase the federal funds rate. The CME FedWatch Tool currently projects the likelihood of a 25-basis point rate hike at 95.8%. This will raise the federal funds rate in the region 1.00% – 1.25%, at the next meeting. 1 week ago, the probability of a 25-basis point rate hike was 87.7%. As the probability of an FFR increases, this tends to act as a damper on the gold price. The interest rate raises demand for the USD, which in turn diminishes demand for gold. Since gold is a dollar-denominated commodity, the geopolitical uncertainty would have to exceed the downward pressure applied by the interest rate hike.

This article was contributed by JournalVoice.


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