The next few months could be a bumpy ride for gold prices, according to analysts at Citigroup.
Between the upcoming acceptance of the Chinese renminbi (yuan) as a bona fide reserve currency by the IMF and the final stretch of the presidential campaigns in the U.S., Citi is warning that volatility may become a key feature of the gold market through October and November.
Continuing Currency Clash
In what is seen as a potential threat to the U.S. dollar’s place as the world’s reserve currency, the International Monetary Fund (IMF) is set to approve China’s currency for inclusion in its Special Drawing Rights (SDR), which is comprised of the world’s most prominent currencies, each weighted according to its perceived importance in global finance: the dollar (41.7%), the euro (30.9%), the renminbi (10.9%), the yen (8.3%), and the pound sterling (8.1%). It’s worth noting that the new 10.9% allocation of renminbi actually detracted from the weighting of other currencies more than the dollar, especially the euro.
As of last year, the yuan was the fifth-most used currency in international transactions. This is the main reason the IMF is adding it to the SDR basket.
However, there are still concerns about the way the communist system in China doesn’t allow the currency’s exchange rate to move freely; the central bank identifies a tight range (2% above and below its par value) within which the yuan is “allowed” to trade. In this light, is the yuan “freely convertible” and risk-free, as the IMF demands? Over the past decade, China has routinely devalued the renminbi in order to boost the competitiveness of its exports on the global market.
In addition to its role as a leading importer and producer of precious metals, Chinese monetary policy is seen as having an increasingly major impact on gold and silver prices.
Trump vs. Clinton Tightens
Another factor that could raise questions about which way gold prices will trend is the U.S. presidential election. This is especially true as the race has gotten closer, with the spread between the two candidates falling within the margin of error in many national and swing-state polls. The tightening of the race has generated even more attention for the election—and its possible disruptive influence on the markets.
Tonight marks the first of three scheduled debates between the two candidates, which will be broadcast to a national audience. You can find some of the leading storylines going into the first head-to-head between Clinton and Trump here.
According to Citi, the bank expects “a Trump win would bring out higher volatility in gold and forex, which in turn should lead to higher volumes in other precious metals.” Citi analysts have also characterized the presidential contest as “increasingly bizarre.” Beyond sparking greater volatility, many forecasters “including Singapore-based DBS Group Holdings Ltd. have said that the U.S. contest may buttress prices amid concern about the possible implications of a Trump presidency,” as reported by Bloomberg.
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