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GE2017: Vote, Vote, Vote for Gold!

Analysis of gold, the FTSE, cash, Gilts and inflation at UK General Election 2017...
 
MAKE NO mistake, writes Adrian Ash at BullionVault.
 
National ballots rarely move gold or other investment prices. 2016's Brexit referendum, like Donald Trump's win as US president, were exceptions rather than the rule – no doubt because, both times, traders and money managers mis-read the outcomes in advance,  guessing that a tight race would leave the status quo in place.
 
The shock of both Brexit and Trump proved however that gold can move on political headlines, but only if that news hits other financial markets. That's because, long term, gold's real value for investors and savers is as financial insurance.
 
With UK voters going back to the polls next month for General Election 2017, do they need to raise their insurance holdings again?
 
Gold today trades 15% higher for UK investors than it did on the eve of the Brexit ballot to leave the European Union. The FTSE100 share index has done better still, gaining 17% for Sterling investors, but lagging Euro and US stockmarkets once you account for the Pound's 10% slump on the currency market.
 
Looking to June 2017's General Election, UK investors and savers will also notice how last year's 52%-to-48% victory for Brexit has now been read by all 3 major parties as a landslide vote against the country's current distribution of income, wealth and opportunity.
 
Even the ruling Conservative Party has squeezed the word "fairer" into the middle of the adjectives on its homepage for this week's new plan "for a stronger, more prosperous Britain". Yes, the phrase "strong and stable" – the robotic keywords of Prime Minister Theresa May's presidential PR machine – does appear 13 times in the 88-page Tory manifesto. But words with the root "fair" appear 45 times, and "equality" seven.
 
Contrast the 1987 manifesto of Margaret Thatcher's deregulating, state-shrinking, investor-championing Tories. The word "strong" showed 21 times, but "equality" only once.

UK gold prices vs. UK government deficits

Theresa May's highly likely win over Jeremy Corbyn's Labour Party will also push back the Conservative Party's target for balancing the government budget. And anyone glancing at a 20-year chart of UK Pound gold prices will see it's not too dissimiliar from the fall, growth, surge and fall back in the UK government's deficit spending.
 
The relationship is far from perfect, and investors don't need a profligate (or "fair") government for gold prices to rise. But since 1995, gold priced in Sterling rose in 6 of the 7 years when the UK's annual deficit on government spending grew as a propotion of the country's economic output, averaging 15.6% year-on-year gains overall. Gold fell in 5 of the 14 years when the annual deficit fell compared to GDP, averaging just 2.1% gains overall.
 
Chart of UK government's annual deficit as percentage of GDP versus percentage change in British Pound gold price. Source: BullionVault via ONS, LBMA
 
While a new Government can of course prove more or less friendly to savers and investors, it’s important not to over-state their influence on investment returns.
 
BullionVault's analysis confirms that, either side of a UK General Election, financial markets tend to continue in the direction they're already taking. So drawing hard and fast conclusions from the average historic patterns would likely prove foolish for investors wanting short-term protection or profit as June 8th approaches.
 
That said, and looking at the last five UK General Elections:-

UK Elections: Financial volatility

It's not only government that goes into purdah ahead of General Elections. The financial markets also go quiet, typically showing lower volatility in the month before a UK vote than the 6 months either side, only to become more volatile in the month which follows.
 
Table of UK asset-class volatilities around UK General Elections. Source: BullionVault
 
Based on the standard statistical meaure of financial market volatility, our analysis suggests traders turn cautious as the ballot approaches, acting more decisively once the result becomes clear.

UK Elections: Asset-class price action

On average since 1997 (and looking at the medians), UK government bonds have outperformed both before and after the last 5 general elections, suggesting perhaps caution and then also relief once the new government becomes clear.
 
Table of UK asset-class price action around UK General Elections. Source: BullionVault
 
The FTSE100 in contrast has risen only weakly on average in advance and then fallen the following month, thanks mostly to the 2001 and then 2010 elections coinciding with sharp downturns in global equities.

UK Elections: Investment returns under Tory vs. Labour

Longer-term, and looking at the last six Governments, perhaps it's no surprise that both the FTSE All-Share and UK government bonds have shown their strongest annualized performances during Conservative administrations.
 
People might expect the City to vote Tory after all, if only because Mrs.May's new-found 'Red Toryism' leaves traders and money managers with nowhere else to go.
 
Table of UK asset classes, total returns (annualized) over last 6 parliamentary governments. Source: BullionVault
 
But inflation shows a more mixed record, and the Pound has slumped under both a Labour and Conservative government, thanks first to the banking crisis and now the Brexit referendum result.
 
That's also been when physical gold has performed best for UK investors, fulfilling its role as financial insurance whichever political party – and whoever's politics – are making the headlines.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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