APRIL 21, 2017, 10:40 AM
The first round of presidential elections in France is held on Sunday. What can we expect from that event and how can it affect the gold market?
In the recent edition of the Market Overview, we wrote that centrist Emmanuel Macron and nationalistic Marine Le Pen were expected to move on the next round. However, the situation has complicated a bit since then. As you can see on the chart below, actually four candidates have pretty good chances to advance to the next round. It’s because both hard-left Jean-Luc Melenchon and conservative Francois Fillon have gained momentum recently.
Chart 1: Opinion polls for the first round of voting (smoothed 14-day weighted moving average) updated daily from Wikipedia.
It’s good news for the gold market, as it means higher uncertainty. Now, Marine Le Pen is not the only terrifying candidate in town. Jean-Luc Melenchon’s economic program is similarly frightening for the financial markets. For example, he proposed to impose a 100 percent tax on those who earn above €400,000. Yup, you guessed, he is a commie and a fan of Hugo Chavez.
The consensus is that Macron and Le Pen will move on to the next round. Therefore, if this scenario realizes, the markets should not be affected significantly. And since Macron is expected to beat Le Pen in the run-off, there may be a relief rally in the French bonds and the euro. The safe-haven demand for gold should decline then, but a weakening dollar would support the yellow metal.
Macron and Fillon would be the best for the financial markets, as both candidates are from the mainstream, so radical changes would probably not happen. It would be the worst scenario for safe havens, but the best for the euro.
Other scenarios are much more interesting. Fillon and Le Pen would go much more neck and neck than Macron and Le Pen. Higher uncertainty should support the safe-haven demand for the gold market. Melenchon and Fillon would be even more fascinating, as the former is expected to beat the latter in the second round. The vision of a communistic president in France could encourage investors to buy some gold. But probably the best scenario for gold would be a run-off between Melenchon and Le Pen. It would be like a duel between Sanders and Trump, only squared. Such a scenario could trigger some financial panic and boost safe-haven demand for gold.
The bottom line is that there is the first round of the French elections this weekend. The outcome of the election is uncertain, since four candidates have chances to move on to the run-off. If Macron advances on Sunday, he is the most likely to win in the run-off, no matter who he faces. We could see then a relief in risky markets and a decline in gold prices. But if he fails, then any outcome is possible. In this scenario, investors should expect rising uncertainty which should provide additional support for the price of gold. The most market-unfriendly outcome would clearly be a face-off between far-right Le Pen and far-left Melenchon. The risk appetite could soften then, which may boost the safe-haven demand for gold (although the likely appreciation of the U.S. dollar may limit the gains). Will this happen? Given a tarnished reputation of polls and a wild surge in Melenchon’s odds, only time will say. Stay tuned!
French Elections and Gold @ 7:18 am Friday April 21st
In the previous edition of the Market Overview, we analyzed the potential impact of the European elections on the gold market. As the Dutch elections are behind us, let’s see how the Wilders’ defeat affected the markets and the political outlook for France, where people will vote for the president on April 23.
Investors reacted positively to the outcome of the Dutch election, relieved that populists did not win. European stocks and the euro rose, while the France-Germany 10-year bond yield spread declined after the elections. This is because Wilders’ failure is considered to indicate that “the wrong kind of populism” is losing momentum.
Although Wilders lost, it does not mean that all risks vanished and the threat of protectionism has gone. Actually, the triumphant party won fewer seats in the last parliament, while Wilders got more than the last time (the same applies to Marine Le Pen, who is much more popular than her father, the founder of the National Front). And Dutch voters are still flirting with populism – they are just more dispersed, as people also voted for other right-wing parties. Moreover, other parties, including the ruling People’s Party for Freedom and Democracy, adopted a more right-wing tone during the campaign, as the prime minister’s decisive approach toward Turkish diplomats showed. Let’s face it: Wilders is the second force in the country now, so he would definitely influence the domestic politics. In a sense, a populist party did not win, but populist ideas were pushed to the mainstream political agenda instead.
Therefore, it is too early to state that Le Pen is set to fail. Importantly, her odds of winning in the run-off increased after the Dutch elections. As a reminder, according to the polls conducted before the presidential television debate, she will win in the first round of voting, but lose in the run-off. Her odds of winning in the second round are 40 percent with Macron and 45 percent with Fillon, but as Emmanuel Macron is believed to have won the debate, the chances of Le Pen fell slightly. The French election is a different kettle of fish, as there are only few candidates (the run-off is between the two contenders who get the most votes in the first round of the elections), while the parliamentary election in the Netherlands was between 28 parties. If the political scene in the Netherlands was not so fragmented, Wilders could win. Another issue is that French economy is performing worse than the Dutch (the unemployment rate is twice as high, while the GDP growth is half of the Netherlands). Hence, although the probability of Le Pen’s victory is not high (in the second round, voters are likely to build a coalition against her), we believe that her chances did not change significantly after the outcome of the Dutch elections. In other words, investors should not extrapolate trends between the Netherlands and France. The presidential election in the latter remains one of the major risks for the euro area.
Thus, investors are nervous ahead of the French elections, and we could see a short-term volatility in European assets and the euro; we could also observe some inflows into gold, the ultimate safe-haven asset. For example, the euro was up 0.6 percent to a six-week high after the French presidential debate, while the French interest rate premium over Germany declined. According to the polls, centrist Emmanuel Macron won the debate, which eased the political risks to the EU from Le Pen. The price of gold rose together with the euro. It shows that investors started to take into account the political uncertainty in Europe after trading solely on expectations of the Fed’s and Trump’s actions. It also indicates that the exchange rate channel is more important for the yellow metal than the uncertainty channel.
However, long-term investors should not overstate the impact of that election on the gold market. As the chart below shows, the price of gold actually declined before the Dutch elections, while the euro gained against the U.S. dollar.
Chart 1: The price of gold and the EUR/USD exchange rate in 2017.
It implies that macroeconomic factors and central banks’ actions may be more important drivers for the currency exchange rates and the price of gold in the long-term. Surely, the French election is much more important than the Dutch, given the size of the French economy and the key role of the country in the EU, but even the surprising and really disrupting Brexit vote caused only a short-term rally in gold prices. Hence, the EUR/USD exchange rate and the price of gold may be strongly affected by the prospects of the election in the short-run, but their impact may not be long lasting.
If you enjoyed the above analysis and would you like to know more about the impact of the current macroeconomic trends and political uncertainty on the gold market, we invite you to read the April Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.