Gold: From French to US politics

Following the favourable outcome of the first round of the French presidential elections, financial markets breathed a sigh of relief yesterday and gold traded lower.

Prices were down 0.6% in US dollars and 2% in euros as the euro jumped to the highest level in more than five months. With Emmanuel Macron now the clear favourite to become president, the gold market’s focus shifts to the United States, where President Trump will announce details of his tax plans tomorrow.

While our expectation of solid growth, a stronger dollar and rising interest rates in the United States are independent of these, Trump’s announcement could nevertheless bring the attention back to the favourable economic backdrop, denting bullishness in the gold market.

Later this week, the debate about the US debt ceiling and a potential government shutdown will intensify. With the Republican-dominated House, we believe there should be a last-minute solution as no party member wants to lose face so early in ‘their’ presidency.

Taking these factors together, we see some more downside for gold and expect prices to move towards our three-month target of USD 1,200 per ounce. Such an easing of the political risk premium would be in line with the historical pattern as politics hardly ever had a lasting impact on prices.

Overall, we stick to our neutral view on gold with a stronger dollar and rising interest rates being the key downside risks.

With Trump’s tax plans being announced tomorrow and the debt-ceiling debate intensifying towards the end of the week, the gold market’s focus will shift to US politics.

We see some more downside and expect prices to move towards our three-month target of USD 1,200 per ounce. Overall, we stick to our Neutral view.

Carsten Menke is Commodities Research analyst at Julius Baer

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