- On March 15, 2017
Like all commodities, gold is affected by supply and demand. But unlike most commodities, gold is also affected by events beyond simple market forces. Whether it’s economic factors like monetary policy or inflation, social unrest or political events, the price of gold can rise and fall based on dynamics beyond supply and demand.
Gold Increases in 2017
Every year provides new challenges to the market for gold, and 2017 will be no different. There are many key factors in play for the coming year, all of which can send the price of gold higher than it has been in the previous several years.
Gold buying deemed Sharia-compliant
In December, the worldwide Muslim population was granted approval to purchase gold under compliance with Sharia law. State Street Global Advisors, operators of the world’s biggest gold-backed ETF (SPDR Gold Shares sym: GLD) was certified by Amanie Advisors of Malaysia as Sharia-compliant. The firm specializes in the interpretation of Islamic financial law.
This ruling has opened the gold market to multitudes of Muslims worldwide who previously were not allowed to trade gold or other precious metals due to the Islamic law prohibition against loans with fees or interest. In December 2016, the World Gold Council worked with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to reach agreement on the criteria for compliance. The financial markets in the Muslim world are massive, with a current value of $2 trillion. This ruling opens the door to Muslims investing in gold ETFs.
Beyond Brexit: Could upcoming European Elections end the EU?
Brexit was a shot across the bow of the EU. Britain’s vote to exit the European Union was not fatal to the alliance, predominantly because the United Kingdom does not use the Euro, but maintained its own currency. But if other large European nations chose to exit the EU, it could be the end. Many large countries will be holding their elections in 2017, and currently anti-EU candidates have become popular in France and the Netherlands. These are the first upcoming elections, with the Dutch elections to be held March 15. Geert Wilders, of the right-wing Party for Freedom, is likely to win. France votes on April 23, with a run-off, if needed, scheduled for May 7. Currently, the far right’s Marine Le Pen is ahead in polling.
If these elections go to the conservatives, it may signal a large movement to leave the Union. Germany holds its election on Sept. 24, with Italian elections on a date still to be determined. Should the Dutch and French choose to leave, this could cause the Euro to tailspin, potentially causing many Europeans to seek gold as a safe haven against currency devaluation.
Deficit Spending Under Trump
Currently there is a great deal of uncertainty about America’s direction in domestic spending and tax policy, global trade and immigration policy law enforcement, along with several other factors. This is currently boosting gold prices, but the Trump presidency may see a jump in the federal deficit, with interest rates ticking up, increasing the expense of maintaining the growing national debt.
Trump has recently announced a proposed $54 billion rise in defense expenditures. His proposed infrastructure plan may cost trillions more. This is similar to the first-term Obama “stimulus” packages that ran the deficit up a trillion dollars per year each year of his first term. The proposed border wall will surely be costly and may not even prove effective. Trump is also proposing tax cuts that will likely pass. If America suffers another recession, tax income will lag just as spending starts to accelerate. Gold performed very well during years of high deficits previously, such as during Obama’s first four years as president.
States Repeal the Gold Sales Tax
In the first two months of 2017, two states addressed the sales-and-use tax for gold. In Virginia, a new law exempts all gold, silver or platinum bullion and legal tender coins with a price over $1,000. A bill introduced in Alabama (not yet passed as a law) would make the gross proceeds of any sale of precious metals, including silver, gold, and platinum no longer subject to taxation. In eliminating the tax on precious metals, these states are treating them as currency instead of as a pure commodity.