Gold Can Protect Holders From Political Crisis
The price of gold may be influenced by many factors including inflation, reckless monetary and/or fiscal policies, supply shortages or war. These factors often act to boost the price of gold vs. global currencies. Political uncertainty or turmoil can also boost the price of gold in local currencies. Sometimes political uncertainty is a result of a country’s economic woes or failed policies. Other times, however, political uncertainty can be driven by a change in voter sentiment towards the government in charge, irrespective of economic circumstances.
While the bench mark price for gold is generally cited in U.S. Dollars (and recently in Chinese Yuan) such gold price often obscures the price of gold in local currencies.
In June this year British voters elected to leave the European Union. The political uncertainty caused by this decision and the subsequent debate over how to achieve an equitable dissolution of the United Kingdom’s bonds with the European Union has caused further uncertainty. As a result of this uncertainty, the value of the British Pound has plummeted. The price of gold, however, in British Pounds has soared 45% this year and is near the 2016 high of £1,050 an ounce. Conversely, as of October 26, the price of gold is at $1265 an ounce or $100 dollars off its 2016 high.
The price of gold in Syrian Pounds with its leader literally fighting for political survival has doubled since September. A government that is barely functioning or with the possibility of no longer existing in its current form has boosted the price of gold in Syrian Pounds.
The price of gold in Turkish Lira rose fifty percent over the past two years, hitting an all-time high earlier this summer during an attempted coup d’état in July. After the coup was put down by the ruling Turkish government, the price of gold in Turkish Lira retreated about five percent but is still up substantially on the year.
Due to political corruption scandals that led to the impeachment of Brazil’s President Dilma Rousseff in August 2016, gold rose 60% against the Brazilian Real from January 2015- February 2016. During the same time period the price of gold actually fell 4% in dollar terms.
Gold has also soared against the Argentine Peso and the Venezuelan Bolívar due to political crisis caused in part by financial crisis.
Gold as Insurance Against Political Uncertainty
Gold provides a hedge against political uncertainty especially when coupled with a failing economy. Political uncertainty in countries may be of varying durations. As political turmoil subsides, a country’s currency may rebound vs gold provide there are no other issues such as inflation or shortages.
Those who hold gold in countries experiencing political turmoil have found gold to be a ‘safe haven’ that preserves purchasing power while local currencies fall due to political uncertainty.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.