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Updated 20:46 16/06/19

A week of two halves: Why the gold price performed so well last week

Liam Sheasby

By Liam Sheasby, News Editor

20 May 2019

Observant readers will have noticed that the price of gold per ounce in Pound Sterling climbed to an impressive £1,013 per ounce last week, but what caused it?

Last Monday saw an initial surge in gold prices across the globe as trade tensions between the US and China escalate once more, with a price peak of $1,302 a day later. The US has threatened to increase tariffs to 25% on $200 billion worth of Chinese imports to America, while China plans to fight back with $60 billion of its own tariffs on US goods if these are implemented.

We previously reported about President Trump’s tweets warning China, following a change of heart from China’s government over agreements made in recent trade talks, but despite talks with Vice Premier Liu He, both nations remained at loggerheads and last Monday China announced it would utilise import tariffs of its own.

The news weakened both the Chinese Yuan and the US Dollar and, combined with an increase in demand, the gold price rose to over $1,300 per ounce for the first time in a month. Major stock markets have also suffered sizeable losses in the last 10 days, with the main Chinese and American indexes listed below:

  • Dow Jones
    Peak: Down 953 points (3.63%)
    Now: Down 178 points (0.69%)
  • S&P 500
    Peak: Down 102 points (3.51%)
    Now: Down 22 points (0.73%)
  • Nasdaq
    Peak: Down 396 points (4.93%)

    Now: Down 100 points (1.27%)
  • Shanghai Index
    Peak: Down 50 points (1.77%)

    Now: Down 57 points (1.94%)
  • CSI 300 Index
    Peak: Down 84 points (2.26%)
    Now: Down 82 points (2.2%)

President Trump downplayed the disagreement as a squabble and tweeted his willingness to deal but stated that China must make concessions and not just change its mind.

This reassurance has helped the stock markets recoup much of the losses experienced in the first half of last week, but in the UK we watched as the price of gold – in Sterling at least – continued to rise; past £1,000 per ounce and again past £1,010.

The reason? Brexit. Theresa May plans to leave office. She has vowed to step aside once the first half of the Withdrawal Agreement is supported by Parliament, and many of her disgruntled MPs were content that there would be a change of leadership in the near-future. Repeated defeats of May’s Brexit proposals have, however, potentially derailed her departure date. This is making Conservative MPs impatient - MPs who are now pushing for May to leave sooner. The PM has promised one final Brexit vote in early June, with the potential for another round of indicative votes, but her inevitable departure has caused a collapse in talks between the Tories and Labour; news which has concerned investors who are keen for resolution as soon as possible.

One line from Jeremy Corbyn’s letter to the Prime Minister was particularly telling: “The increasing weakness and instability of your government means there cannot be confidence in securing whatever might be agreed between us.” Corbyn’s point is that whoever takes over from May is not obligated to be of the same mindset when it comes to Brexit; hardly surprising but a big risk when nearing the summer recess in the Commons.

MPs break up for the summer holidays late in July and return in September. This takes away a third of the remaining time for MPs to reach a Brexit consensus but, there is also the problem of the European Parliament. Sessions are also limited there, with only 11 scheduled between now and Halloween. This is always subject to change, but the fact is that – as of now – there will be around seven or eight opportunities for the European Parliament to discuss a proposal agreed upon by the House of Commons – if one reaches them. Can MPs achieve it? Will the new Prime Minister and Conservative leader continue to compromise or push for a hard Brexit? The uncertainty is key, and that’s what will keep the gold price high in GBP unless challenged.

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