European Politics And Its Indirect Effect On Gold Prices

The European elections take place this Thursday in the UK and the polling suggests a win by a large majority by the Brexit Party.

Theresa May intends to ask her cabinet to sign off a package of Brexit concessions this week, as she ramps up for one last bid to win over MPs.

The lack of clarity surrounding this issue is having a negative effect on both the Pound and the Euro and thus the US Dollar glistens by comparison and remains strong.

However, in the precious metals market a number of aberrations are now forming which should provide lucrative opportunities for a nimble options trader.

Preamble

The European elections take place this Thursday in the UK and the polling suggests a win by a large majority by the Brexit Party which was formed just 5 weeks ago. Some bookmakers have the Brexit Party at 1:20 with the second place going to the Labour Party at 20:1, in their eyes the Brexit Party will win the most seats by a large majority. As I have said before the last thing that the EU wants is the return of Nigel Farage as his stance for independence and democracy causes restlessness within other nation states.

If the EU can throw the British PM a bone and she in turn can persuade a few of the opposition MPs to vote for the three times rejected EU treaty, then it might pass. Theresa May intends to ask her cabinet to sign off a package of Brexit concessions this week, as she ramps up for one last bid to win over MPs and salvage her version of Brexit.

If that happens then the UK will be out of the EU in terms of having representation but tied in via the new treaty and as a result that would be unpalatable for many in the UK. The fight for democracy in the UK will not stop regardless of parliamentary decisions so I expect that this issue is not going to be put to bed for some time.

The lack of clarity surrounding this issue is having a negative effect on both the Pound and the Euro and thus the US Dollar glistens by comparison and remains strong.

To summarize the US Dollar Index is made up of a basket of currencies including the Pound sterling at 11.9% and the Euro at 57.6%. When these two currencies are under pressure and head south the US Dollar becomes the beneficiary and remains buoyant.

The US Dollar has an inverse relationship with gold so as the US Dollar strengthens gold prices weaken. We have been through a phase of rate hikes in the US which now appears to be over. The next move could be a rate cut and if that was then followed with the reintroduction of QE the US Dollar would lose its gloss and commence a decline. It is this sort of ignition that will set the gold market on fire. Until then or until we experience a 'Black Swan' event gold prices will continue to trade sideways at best.

A Quick Look At The Charts

The chart below shows the steady advance of the US Dollar and its penetration of the resistance level at '97' which now becomes a support level.

The chart below shows the Euro and its steady decline over the last 12 months as the Brexit issue remains unresolved.

The chart below shows the Pound which is lower than it was 12 months ago despite its attempts to rally from time to time.

Conclusion

A number of questions remain unanswered:

Will Brexit be resolved, or will it drag on for years?

If the UK does leave will it be independent and able to trade worldwide?

Will the EU be better off without the UK?

Will either currency improve in the near future?

Will uncertainty continue to weigh on these two currencies to the benefit the US Dollar?

We can only conclude that the situation remains hazy making it difficult to position ourselves in terms of trading.

However, in the precious metals market a number of aberrations are now forming which should provide lucrative opportunities for a nimble options trader. This is an area that we are currently focusing on with the view to taking advantage of such aberrations in the knowledge that it involves a high level of risk.

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Go gently.

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