The next big gold rush

Gold loves a crisis, which is what investors thought they were seeing yesterday (November 9) with the election of Donald Trump as US President. Within 24 hours however, the supposed crisis had passed and the gold price had retreated – for now.

In a remarkable five hours of panic buying the price of gold was lifted by $US61 an ounce (4.8 per cent) from $US1272/oz to $1333/oz, before retreating to exactly where it started; $US1272/oz.

Australian goldmining companies rallied even harder, with the ASX gold index rising by 9 per cent as leaders such as Newcrest added $2.75 (12 per cent) to $25.35 and Northern Star enjoyed the same percentage rise (12 per cent) as it put on 52c to $4.64.

Given the retreat in the gold price as the US election result is digested and Trump's bombastic election rhetoric tones down, it is likely that most of Wednesday's gains will be washed away.

If there was anyone who slept through the dramatic presidential election count they might now be imagining that the past 24 hours was a calm period on financial markets, with not much changing.

Obviously a lot did change, but precisely what will not be known for months, and in that time gold is in the front line of a series of events with the potential to be as dramatic as the election of Trump and Brexit – the June decision by Britain to quit the European Union.

What's next for gold?

Politics, not logical financial-market investment decisions, are driving demand for gold, as they have in the past and will do in the future.

Europe, or more specifically the break-up of Europe, is the next possibility as a populist revolution rolls around the world in a dramatic aftershock of the 2008 global financial crisis, which enriched a handful of people but left millions poorer, and angry.

Brexit can now be clearly seen as the first shot in a war of ideas that is changing the way the world works. President-elect Trump is a bigger and louder variation of that same theme. The potential election of populist political parties in Italy, the Netherlands or France over the next six months could trigger the full-scale destruction of the European Union.

Tipping those future political events is risky, but as the enormity of the US election is digested by financial markets it will also become harder to ignore the possibility of a full-scale European break-up, the abandonment of the region's common currency, the euro, and a return to national currencies.

It's the possible currency shake-up which is the big game that lies ahead for gold, a commodity and a currency rolled into a single asset class.

Does gold stack up?

The question for investors to consider is whether it would be wise to risk exposure to gold in the belief that Europe is next in line for a political revolt?

The answer is that you do not have to believe that Europe will return to a group of sovereign nations with their own currencies, you only have to see gold as an insurance policy against such an event.

Arguments in favour of gold as a sheet anchor in an investment portfolio, in one of its many forms (bullion, exchange-traded funds or equities) remain as valid today as before the US election for one very simple reason: no-one knows what's coming next.

Some normally restrained analysts are quite excited about gold. HSBC Bank sees significant changes in currency values ahead with the US dollar weakening against the euro, the yen and the Swiss franc.

“Gold prices would also likely extend their rally given its safe haven status,” HSBC said on Wednesday.

“Ahead of the election we forecast gold could rise to $US1500/oz were Trump to win. We would expect much of that move to happen swiftly.”

HSBC was right, for a while. Gold did rally strongly, though the $US1500/oz target was not reached during the panic trading.

Europe is the next big event for gold, and the success of Trump and the exit of Britain from the EU are pointers for an exciting time for gold, a currency beyond the reach of governments.