What does it mean for the current gold market? Well, we could see some safe-haven bids in the shortterm (perhaps until the new government forms), but the overall effect in the longrun should be detrimental, at least if we agree that the populist’s victory in the third largest economy in the Eurozone is bad for the currency. Given that gold has benefited recently from the rebound in the euro and the weakness in the dollar, if the EUR/USD declines, gold may suffer. Indeed, gold prices declined yesterday, as the chart below shows.
Chart 4: Gold prices over the last three days.
However, investors should not forget that populists are strong not only in Europe but also in the U.S. President Trump does what he can to weaken the U.S. dollar (think about the recent tariffs and fiscal deficit). Moreover, the Eurozone economy is healthier today than one year ago. The strong economy makes investors more tolerant of uncertainty. It means that markets may shrug off geopolitical factors and focus on macroeconomics. Please note that investors are used to political turmoil in Italy – actually, forming a government is a national sport in that beautiful country. Stay tuned!