‘Sell The Rumor, Buy The Fact’: Gold May Bounce Back After Macron Win

Thursday May 04, 2017 21:44

Gold prices might see a recovery following the widely-anticipated Emmanuel Macron’s win in the second round of the French elections this Sunday due to the classic traders’ behavior of ‘Sell the Rumor, Buy the Fact,’ this according to one analyst from Societe Generale.

Gold has been under pressure for almost two weeks now due to an easing of geopolitical tensions and a more hawkish Federal Reserve, Societe Generale Head of Metals Research Robin Bhar told Kitco News in a telephone interview.

But, the yellow metal might not have much further to fall after the largely expected Macron win in the French election run-off, as the market might have already priced in that event, Bhar said.

“So, when the vote result is announced, you could see a bounce in the gold price on the classic ‘Sell the Rumor, Buy the Fact’. That is often what happens in the financial markets and also in gold. Participants try to price ahead of the event, and when the event actually happens, you then get a counter-trend move. That could well happen again this time around,” Bhar noted.

The risk of Marine Le Pen being voted in on Sunday seems to be receding quite rapidly, the analyst said, adding that the market is “friendly” towards a Macron victory this weekend.

“Our expectation is that Macron is declared the winner by a fairly sizeable margin. Opinion polls are tracking currently 60/40 to Macron, so a 20-point lead at the moment. What the market fears is Le Pen victory because that would mean more uncertainty because she has threatened to take France out of the European Union, to ditch the euro. There is a lot more certainty with Macron because he will continue pretty much the policies and strategies that the French government is following at the moment,” Bhar explained.

Gold prices have rallied prior to the first round of French elections on increased safe-haven demand amid fears that Le Pen could win, however, those threats have dissipated now, as Macron managed to gain substantial support as a front-runner in the first round of elections.

Gold has been under heavy pressure since then as tensions eased, both around the French election and the Korean Peninsula, noted Bhar. “Any safe-haven buy ahead of those geopolitical events have been liquidated,” he said.

Fed And The Long-Term Outlook

In the long term, gold prices might continue to face some pressure this year, as the Federal Reserve proceeds with its tightening cycle, according to Bhar.

“Many economists are still of the opinion that the Fed will raise rates two more times this year and three more times next year,” the analyst said. “We have the Fed biased towards more hawkish tendencies. After the central bank met on Wednesday, it released the statement, which suggested that it is still on course to raise rates at least a couple of times this year and trim the Fed’s balance sheet,” the analyst said.

Historically, the tightening monetary cycle in the U.S. tends to be negative for gold because it raises the opportunity cost of holding gold, Bhar added.

“When rates go up, bond yields move higher and real interest rates move towards positive territory. All of these factors are negative for gold. Rising rates tend to bolster the dollar, gold is priced in dollars, so the dollar-gold price would come under pressure from rising rates,” he said.

On the upside, Bhar is looking around $1,250 level because that is where a 200-day moving average is located. “That would be the first line of resistance,” he said. And then, he is eyeing the $1,290 level, where gold recently registered its high. On the downside, Bhar is watching the $1,220 and $1,200 levels as technical support levels.

At the time of publication, spot gold on Kitco.com was trading flat, remaining near six-week lows, at $1,228.30.

By Anna Golubova
For Kitco News