Macron, Le Pen And Gold

Macron will face Le Pen in the second round of the French presidential election. What does it mean for the gold market?

Initial Results

According to the initial results, centrist Emmanuel Macron and nationalistic Marine Le Pen will fight for the French presidency in the run-off. The latest interior ministry’s figures with 97 percent of votes counted show that Macron took the first place with 23.9 percent of all votes counted, while Le Pen came second with 21.4 percent. Conservative Francois Fillon took the third place, winning 19.9 percent, while far-left Jean-Luc Mélenchon was fourth, with 19.6 percent. The results are groundbreaking, as both major establishment parties (the Socialist Party and the Republican Party) were eliminated in the first round, in line with previous market expectations.

The Run-Off

As no candidate won a majority, a run-off between Macron and Le Pen will be held on May 7. The polls suggest that Macron will beat Le Pen with the expected result of 63.5 vs. 36.5 percent, as one can see in the chart below.

Chart 1: Opinion polls for the second round of voting (smoothed 14-day weighted moving average) updated daily from Wikipedia.

Politics nowadays is quite unpredictable, while polls often inaccurate, so our faith in them should be limited. However, the future looks more promising for Macron, as voters could strategically vote against Le Pen. Indeed, most of the other candidates and establishment politicians have already called their supporters to vote for Macron. Benoit Hamon, the candidate of the Socialist Party, urged voters to back Macron, despite that he is not a socialist. But “there is a distinction between a political adversary and the enemy of the Republic”, he said. The last time the National Front came this close to the presidency was in 2002. Jean-Marie Le Pen, the father of Marine, surprisingly moved on to the second round of election, gaining 16.9 percent of votes, only three percentage points less than Jacques Chirac. However, in the run-off Chirac crushed him with more than 82 percent of the vote, winning the biggest landslide in a French presidential election. Hence, if voters across the spectrum vote for Macron, there may be a replay from 2002.

Market Reaction

The euro jumped about 2 percent after the initial results when markets opened in Asia. Indeed, as the chart below shows, the euro reached a five-and-a-half month high against the U.S. dollar. This is because Macron is seen by the financial market as the most appropriate candidate who is likely to beat Le Pen in the second round.

Chart 2: The exchange rate of the euro against the U.S. dollar over the last 3 days.

Indeed, Macron was an investment banker and former economy minister. He promised business-friendly policies and reforms of France’s welfare system and labor market. And in contrast to Le Pen, Macron is a strong supporter of the EU. As Le Pen is a supporter of pulling France out of both the EU and NATO, her presidency would be a radical shock not only for the French politics, but also for the whole European Union and the post-war order.

Hence, as Macron managed to move on to the second round, there was a relief rally, as we had already predicted. The investors are confident that he will easily win against Le Pen in the second round. In consequence, the safe-haven demand for gold declined and the price of gold dropped from about $1,285 to $1,265, as one can see in the chart below.

Chart 3: The price of gold over the last three days.

Conclusions

The bottom line is that Macron and Le Pen advanced to the second round of the French presidential election. The results were regarded as the best of several possible outcomes, so there was a relief rally in the euro and a pullback in gold prices. There could be some further recovery in French bonds and the common currency, however, some volatility in the gold market should remain until the second round is concluded.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor