Wednesday March 29, 2017 22:49
As gold bulls are looking to break key resistance levels, IG chief market strategist Chris Weston tells Kitco News that markets should not completely discard the chances of the far-right candidate Marine Le Pen winning the French presidential election.
With still about a month to go until the French election’s first round of voting begins on April 23, political instability is not playing much of a role in driving gold prices, Weston said. “If people would genuinely believe there was something to worry about, it would be visible when looking at gold volatility indexes.”
In Europe, people are only starting to enter “the eye of storm,” he added.
What is worrisome to Weston, is that markets are currently not expecting Le Pen to win the presidential election at all. “Instead, markets are pricing in a 70% chance that the French centrist candidate Emmanuel Macron will win.”
If market consensus is wrong, which has happened in the past, with the most recent example being the Brexit vote, it could spell out major volatility, including drastic sell-off of French assets and buying of gold.
“We might even see a positive correlation between the U.S. dollar and gold, with people selling the euro and embracing safe haven assets.”
One of the biggest concerns with the French election is the nation’s public debt. If Le Pen wins and follows through on her promise to take France out of the euro, it would effectively trigger redenomination of $1.8 trillion of French public debt into francs.
“80% of French debt is not under international law and if they remove themselves from the euro and go back to the franc, that debt will be worthless and constitute world’s biggest default,” Weston said.
Concerns over this kind of instability can lead to another major surge in gold, according to the IG’s chief market strategist.
When discussing what else might push gold prices higher, Weston described a scenario in which yields move lower, economic data around the world becomes less positive, and the Fed’s approach to rate hikes continues to be dovish.
Gold has seen a very positive rally in March, Weston noted, coming up from a $1,195 low and briefly touching the $1,261 territory.
“I see gold as a derivative to other markets, specifically to real yields. Trump issue acted as a major driver, but, more importantly, we have seen real rates moving into negative territory as well,” he stated.
What is interesting about the March rally, however, is that the yellow metal is still holding onto its Fed-induced gains. “The key price range for gold is now between $1,195 (February low) and $1,264 (February high),” Weston said, adding that “bulls are now looking for a break above the one-month high.”
At the time of publication, gold spot prices were trading 0.37% lower at $1248.70.