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Arkadiusz Sieron

Arkadiusz Sieron

Writer, Sunshine Profits

Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of…

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Are Gold Markets Ignoring Geopolitical Risk?

Gold

Almost 5500 miles ( 8,800 kilometers ) . That’s the distance between Pyongyang and Rome. It seems a lot, right? But not for gold, the truly global monetary asset. In recent days, the price of the yellow metal has immediately reacted to the developments around both North Korea and Italy. What has happened?

Love Is a Battlefield

As Pat Benatar beautifully sang, love is a battlefield. The same applies to the gold market. The chart below shows the price of gold in 2018. As one can see, the price of the yellow metal dived on May the 15th below $1,300… just to rebound several days later.

(Click to enlarge)

Chart 1: Gold prices in 2018 (London P.M. Fix, in $).

What happened? Well, gold plunged because of the rebound in the greenback. The U.S. dollar strengthened partially (aside the Eurozone’s problems and rising yields on American Treasuries) because of the eased conflict over the Korean Peninsula. President Trump was supposed to meet with the North Korean leader Kim Jong Un in June. But Trump pulled out of the June the 12th summit on Thursday, sending gold prices again above $1,300. Diplomatic negotiations are a battlefield. However, as the chart below shows, the jump was temporary, and the price of gold has gradually fallen since Friday. As we constantly repeated, geopolitical factors in general, and threats from the North Korea in particular, have only short-lived and limited impact on the gold prices.

(Click to enlarge)

Chart 2: Gold prices (London P.M. Fix, in $) from May 25 and May 28.

Good Morning Italy with Your Elections

Fast teleportation to Italy with the spaghetti al dente, strong coffee, and political instability. On Monday, Italy’s President Sergio Mattarella nominated Carlo Cottarelli, a former International Monetary Fund official, as interim prime minister with the goal to pass the next budget and to plan snap elections in the autumn or early next year. The decision to appoint Cottarelli, was a surprising move, as it means a conflict with the anti-establishment forces which gained the majority of votes in March elections. President Mattarella vetoed the 5-Star Movement and League’s choice of a euro-sceptic Paolo Savona as economy minister, because he had threatened to pull Italy out of the Eurozone. He explains this move, saying:

The uncertainty over our position has alarmed investors and savers both in Italy and abroad. Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion. Related: Emerging Markets Face Financial Turmoil

Hence, President clearly wanted to calm financial markets. But it might be a bear’s favor. You see, snap elections may lead to an even stronger mandate for the country’s populist parties. The President’s decision might be interpreted as desperate and disrespectful for popular vote establishment’s maneuver to remain in power. It is grist for the populist’s mill. Hence, the euro declined again the U.S. dollar, as investors are afraid that anti-euro forces will strengthen in Italy.

And more weakness might come. The Italy’s snap election in autumn could create a problem to ECB which considers to start winding down its quantitative easing program by September. If the central bank postpones the reduction of its monetary accommodation, the U.S. is likely to strengthen further, putting the yellow metal under downward pressure.

Implications for Gold

As we have argued in our Gold News Monitor and Market Overview for a long time, gold behaves like a currency. But it’s not a typical currency, as it is not linked to any particular country or economy. Gold is a real international monetary asset, the ultimate safe haven against global turmoil. Indeed, on Thursday, its price jumped in reaction to Trump’s cancellation of the meeting with Kim Jong Un.

But it started to decline soon after, partially to the revived hopes that the U.S. President would eventually meet with the North Korean leader (investors should always remember about Trump’s unique negotiation and communication style). But the gold prices reacted also to the developments in the Old Continent, i.e. to concerns about the snap election in Italy. Adding to these worries was news that Spanish Prime Minister Mariano Rajoy would face a vote of confidence on Friday (as dozens of people linked to the ruling center-right People’s Party were convicted of corruption). Another potential hit for the euro. In consequence, Italian and Spanish borrowing costs relative to Germany’s increased substantially. So the U.S. dollar bulls should have a good time for a while. But we cannot say the same about gold bulls, at least in the near future. Investors should also remember that the Volcker rule might be soften soon, which should support the financial sector, reducing additionally the safe-haven appeal of gold. Stay tuned!

By Arkadiusz Sieron via Sunshine Profits

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