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European Elections Reject Austerity

Release Date: 
Monday, May 7, 2012

The price of gold fell on a sharply lower euro after weekend elections in Europe resulted in a rejection of the austerity measures imposed by France and Germany in response to the regional debt crisis. Gold traded at $1,636.70 per ounce, down $6.40, at 7:40 a.m. Pacific Time on the New York Spot market with silver at $29.99 per ounce, down $0.45. (Click here for the most current spot prices.)

French voters elected Socialist party candidate Francois Hollande over the incumbent President, Nicolas Sarkozy. Greek voters backed fringe parties over the two leading political parties that supported austerity measures imposed by the EU. The Greek election may result in political deadlock over formation of a governing coalition. In Germany, Chancellor Angela Merkel's coalition was defeated in a state election. "A firmer U.S. dollar, which rose significantly against the euro in the wake of the elections in France and Greece at the weekend, is weighing on [the gold] price this morning," Commerzbank analysts said in a note.

"With growing influence of anti-austerity political blocs, tensions among the euro zone will likely be intensified and a wave of renegotiations for bailout programs may be sparked," Credit Agricole wrote.

In analyzing the effect of European elections on gold prices, Phil Streible, Sr. commodities broker at RJO Futures, said, "if you look at gold versus the euro currency, it is actually trading significantly higher with the euro currency breaking the $1.30 level, so you are seeing European investors go into the gold market. It's just that we're not seeing it in dollar terms. We're seeing it in euro currency terms."

Barclays Capital said in a report that gold is in a trading range, but "a move above the $1,690 area would confirm our bullish view toward the range highs near $1,800." The bank added, "seasonality leads us to expect a mid-year sideways chop before we become more bullish in the second half of the year."

"Your best chance for a QE3 scenario is a breakdown of the jobs market," said Phil Streible, who is closely tracking weekly U.S. unemployment claims. "If we continue to see those initial claims tick up and the jobs market deteriorate, I think that's your best chance of that QE3."

(Source: "European Elections Good for Gold," TheStreet, May 7, 2012; "PRECIOUS-Gold dips as European elections hurt euro, stocks," Reuters, May 7, 2012; "Gold down as dollar rises on European elections," MarketWatch, May 7, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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