The first round of the French presidential elections is behind us. Now, the main developments in Europe which may affect the gold market – except the turmoil in the still fragile banking sector – are a run-off in France and Brexit. Let's analyze them and their potential impact on the gold prices.
As everyone already knows, centrist Macron and nationalistic Le Pen are set to face off on May 7. That pair is the best possible outcome for the markets, as Macron is believed to easily beat Le Pen (although the race is open, especially if Jean-Luc Melenchon backs Le Pen). This is why the price of gold dropped on Monday after the first round of the election, as one can see in the chart below.
Chart 1: The price of gold before and after the first round of the French presidential elections.
As a reminder, Macron is a keen supporter of the euro and the EU. He promised to cut corporate taxes and reduce public spending (France has the highest level of government expenditure among the OECD countries – about 57 percent!). In contrast, Le Pen wants to drop the euro and hold a referendum on France's membership in the EU. So it's not surprising that investors are afraid of Le Pen's agenda. Her victory would shake certain risky markets, boosting the safe-haven demand for gold. In contrast, Macron's triumph should cause another relief rally in risky assets and the plunge in the gold prices. Moreover, Macron could be a harmless president because he lacks the backing of a major party in the French parliament. However, the impact of his win should be limited and probably softer than in the first round. This is because his lead in the polls is enormous, while the first round was a very tight race.
When it comes to Brexit, a lot has happened recently. First of all, at the end of March, Theresa May, the British Prime Minister, triggered Article 50, formally launched the Brexit process. The exit process will be very gradual, so the impact on the markets should be limited. However, given tough diplomatic relations between Brussels and London, and the amount of issues to negotiate, Brexit could easily become the messiest divorce in history. Investors should expect many dramatic and chaotic twists, potentially supporting the gold prices, at least in the short-term.
