On Tuesday, the price of gold fell to a two-week low on the French election. What does it mean for the gold market?
As we reported on Monday, the first round of the French election is over: Macron and Le Pen advanced further. As polls suggest that the former will easily become the president, investors increased their appetite for risky assets, turning away from gold. Does it imply a bear market in gold now? Well, the downward move in gold is not surprising, as an important risk is now out of the market. It seems that the EU has dodged another bullet, as Macron will not call for a Frexit referendum or France’s withdrawal from the Eurozone. And some analysts point out that gold declined despite the slide in the U.S. dollar. However, they often move in tandem due to changes in the safe-haven demand related to the situation in Europe. The drop in the price of gold was comparable to the move in the greenback.
Therefore, some correction is perfectly understandable, but we do not believe that the French election was a revolution. What we argue is rather that the geopolitical concerns should lose some importance and economics of gold will now take over. Surely, there are many uncertainties left. For starters, we could witness another government shutdown this week. However, this threat also receded, as Trump dropped his demand for immediate funding for the wall with Mexico yesterday. Surely, there is a risk that the conflict with North Korea will accelerate, but it seems that geopolitical tensions have eased on balance since mid-April.
To sum up, the price of gold fell to a two-week low after the first round of the French election. It does not mean that the yellow metal has to go lower. There is, of course, room for further declines, especially if the investors believe that Macron is a wonder maker and that real interest rates will go up. However, it is not the case that previous rally was caused only by geopolitical risks, so gold has to collapse without them. Hence, macroeconomic factors should now get out of the shadows – and they send mixed signals. What is probably most important is that real interest rates have rebounded this week, which is not good news for gold if this trend continues.
