Gold's Appeal Now That Brexit Uncertainty and China Trade War for Global Economy Are Gone / Commodities / Gold & Silver 2019

China and the U.S. have reached a preliminaryagreement, which softens their trade war, while the landslide victory ofConservative Party in the UK parliamentary elections clears the path to Brexit.Given that downside risks for the global economy are now significantly lower,how much do investors still need gold?

UKParliamentary Elections and Gold

On Thursday, the British people voted in another snapparliamentary election (the third such since 2015) called by Boris Johnson inOctober due to increasing parliamentary deadlock over Brexit. The Conservative Party won a landslidevictory. The Tories got 43,6 percent of votes which translated into 365 seats.It means a net gain of 48 seats since 2017 elections. As a result, theJohnson’s party won with a majority of 80 seats, the highest since 1987. TheScottish National Party also gained seats which can lead to the secondreferendum on Scotland’s independence in the future. In contrast, the LaborParty performed disastrously, losing 60 seats, which was their worst result inmore than 80 years. Jeremy Corbyn, the party’s leader, has already said he willstep down early next year.

What is, however, the most important, is that the results empower the prime ministerwhich promised to ‘get Brexit done’ by the end of January. It means thatthe odds of Bremain diminished,while the chances of a quick exit increased. You might have different opinionson Brexit, but the prolonged uncertainty was certainly harmful for the economy.Now, that uncertainty is removed and companies can implement long-term plansonce again. This is why the pound has soared after the results were published,as the chart below shows. The markets were simply fed up with the uncertaintywhich was finally removed. And the relief came, then. Thus, the results are bad for safe havens such as gold.

Chart 1: GBP/EUR exchange rate fromDecember 10 to December 16, 2019

Phase OneTrade Deal and Gold

On Friday, President Trump announced that the US andChina had agreed to phase one tradedeal. The 25-percent tariffs on Chinese imports would remain but the15-percent tariffs levied on other goods would be cut in half. Moreover, theadditional, penalty tariffs set for December 15th will not be implemented. Inexchange, China agreed to purchases of U.S. agricultural and other goods. Thetwo sides will also start immediately negotiations on more contentious issuessuch as intellectual property, technology transfer, etc. Trump tweeted:

We haveagreed to a very large Phase One Deal with China. They have agreed to manystructural changes and massive purchases of Agricultural Product, Energy, andManufactured Goods, plus much more. The 25% Tariffs will remain as is, with 71/2% put on much of the remainder. The Penalty Tariffs set for December 15thwill not be charged because of the fact that we made the deal. We will beginnegotiations on the Phase Two Deal immediately, rather than waiting until afterthe 2020 Election. This is an amazing deal for all. Thank you!

Of course, the agreement is just a phase one of thethorough deal and still a lot may happen on the way. So, we are not surewhether the announced success is a real game changer for the global economy.However, the benefits are indisputable. No further tariffs were added, and someof the September tariffs were reduced, while China has agreed to buy $200billion more in U.S. goods and services over two years. From the fundamentalpoint of view, the deal removed a keysource of uncertainty for the global economy that hampered businessinvestments and purchases of risky assets. Hence, the deal could revive therisk appetite among investors and make safe-haven assets, including gold, to struggle.

Implicationsfor Gold

What a big changehas happened in the last few days! Not so long ago, the global economy wassuffered from the uncertainty stemming from Sino-American trade war and Brexit.These risks were so grave that the Fed decided todeliver a few interest rate cuts, just as an insurance (but do not count onhikes when there risks dissipated!). Everyone was talking about recession andgold prices soared, peaking in early September.

Fast forward to today, and the path looks way clearer now. Boris is determined to deliver Brexit quickly, maybe even in January.Meanwhile, across the pond, Trump stroke a phase one of the trade deal. Thereis still a long way to go, but the specter of the full-blown trade war is over.The impact of geopolitical events on the goldprices is often exaggerated, but the easing of concerns about the two majorsources of uncertainty for the global economy should revive the risk appetite, hitting gold and other safe-haven assets.

However, the yellow metal has shrugged off the last week’s developments so far,which is good news, as one can see in the chart below. So, maybe, the price ofgold will not adjust downward after the big news from Friday. Or it could evenincrease, given historically strong January gold performance.

Chart 2: Goldprices from December 13 to December 16, 2019

Having said this, the reducedrisk aversion should fundamentally support the stock market at the expense ofprecious metals market. We will be watching carefully how the situationevolves, stay tuned!

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Arkadiusz Sieron

Sunshine Profits‘ MarketOverview Editor

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