Precious metals knocked down by European politics

In the boxing sport, there is a famous adage saying “they never come back”. Precious metals had to take a hit by European politics and where knocked down. However, unlike a boxer being counted out, the precious metals might already come back this week. The reason for the recovery might be again political developments in Europe. But it all depends on success or failure to built a new government in Greece.

Two elections on Sunday May 6 were the trigger for a significant fall of precious metal prices. In France, a new president had been elected and Greece voted for a new parliament. In France, the candidate of the Socialist Party, Mr. Hollande, did win the presidential election and will be inaugurated next Tuesday, May 15. The opinion polls indicated already that incumbent president Sarkozy would be defeated by a wide margin. Thus, the victory of Mr. Hollande should not have come as a surprise and should have already been discounted in financial and commodity markets. Nevertheless, market participants - especially in Asia - were worried that the victory of Mr. Hollande would imply an end of austerity policy in the eurozone. From our point of view, these fears are overdone. The new French president is still committed to balance the budget, however, over just one year more than currently scheduled. During the election campaign, Mr. Hollande insisted that the fiscal compact should be enhanced by a pact to promote also growth in the eurozone. This demand should not worry investors. The austerity policy prevailing in many countries of the eurozone leads to recession. Therefore, measures would have to be taken to stimulate growth. The next EU summit in June will also have a growth initiative on the agenda. Thus, political positions of Mr. Hollande are not endangering the policy of reducing budget deficits. Quite the opposite, measures to promote growth could prevent a vicious circle that had been observed during the Great Depression in the 1930^th.

A stronger impact on precious metals had the result of the general election in Greece. The main winners were parties at the far right and far left wing, all opposing the austerity policy which the two parties supporting the government of Lucas Papademos agreed with the troika of EU, IMF and ECB. These two parties were punished by the voters. The leader of the conservative New Democracy party, Mr. Samaras insisted on early elections. He speculated to win the election and to become the next prime minister. However, his speculation failed miserably. His party gained the most votes, but it was not sufficient to form a new government. The radical left party Syriza, which opposes the austerity measures agreed with the troika, became second strongest party in the parliament. Failures to form a new government supporting the membership of Greece in the eurozone and the austerity measures had a negative impact on the EUR/USD exchange rate. The weaker euro pulled precious metals lower.

The pressure on the euro resulted to some extend also from calls of some politicians that Greece should leave the eurozone. Also analysts and strategists, media reports and traders often state that Greece would have to quit the euro. However, whether Greece is going to stay in the euro or going to leave the single currency is only up to Greece. According to the EU treaties, there is no provision for leaving the euro. Thus, neither Germany nor Luxembourg’s foreign minister can kick Greece out of the euro. According to latest opinion polls, 78% of the Greek population favors to stay in the eurozone.

At the time of writing this article, there is some confusion about the state of the final round of negotiations to form a new government. Greek president Papoulias had a first meeting with the leaders of the three main parties after last Sunday’s election. This meeting lasted for 90 minutes. After the meeting, the leader of the radical left party Syriza stated that three other parties would form a government, which has a majority of 168 from 300 seats in parliament. However, this has not been confirmed by the parties involved, the New Democracy, Pasok and the democratic left (Dimar). The leader of the New Democracy stated after the meeting with president Papoulias that negotiations would still go on. President Papoulias will also meet the leaders of the smaller parties today.

The major hurdle is the demand of Dimar that also Syriza should be part of a coalition government. If president Papoulias could remove this hurdle in the talks with the smaller parties, Greece would probably get a new government. If this stumbling block is insurmountable, then Greece is likely to hold another election on either June 10 or 17. The president has a few days left for the negotiations but a new government has to be built before the parliament session opens on May 17. If Greece will get a new government - either today or within the next few days - then this is probably positive for the euro, and therefore, also for precious metals. However, a failure to form a Greek government is most likely negative for the euro and thus also for precious metals.