Will Catalan Independence Make Gold Rally?

Catalonia declared independence from Spain on Friday. What does it mean for the gold market?

So it finally happened. On Friday afternoon, the Catalan regional parliament voted to declare independence. The declaration passed with 70 votes for and 10 against in a 135-seat parliament. The move was welcomed by secessionists, but the federal government did not share the enthusiasm. On Saturday, it took advantage of Article 155 of the Spanish Constitution, suspended the autonomy of Catalonia and took charge of its institutions. Rajoy’s government published an official bulletin that dismissed all members of the Catalan government. Control was handed to Spain’s Deputy Prime Minister, Soraya Saenz de Santamaria. The central government also called a local snap election.

As one can see in the chart below, the price of gold increased in the aftermath of the Catalan declaration of independence.

Chart 1: Gold prices from October 25 to October 27, 2017.

Interestingly, that rise came despite the decline in the euro. As the next chart shows, the euro plunged after the dovish ECB meeting on Thursday and conflict over Catalonia, marking its biggest weekly loss of the year.

Chart 2: EUR/USD exchange rate from October 25 to October 27, 2017.

It indicates that the tension between Madrid and Barcelona triggered safe-haven demand for gold, which outweighed the impact of a stronger US dollar relatively to the euro. Investors are afraid of further instability in Spain. The Catalan declaration of independence may also strengthen other secessionist movements present in the EU. And there might be some clashes between both sides. Moreover, even if Madrid quickly and easily takes over Catalonia, it will not end the problems. About half of Catalonians support independence – and Madrid’s intervention may actually strengthen this sentiment.

However, we bet that the impact of the safe-haven demand will wane over time (unless the Spanish government adopts the argument of force instead of the force of argument, releasing the genie of violence from the bottle) and macroeconomic factors will dominate the gold market once again. And after the dovish ECB meeting in October and strong US data (the GDP grew 3 percent in the third quarter, faster than expected), the outlook is rather bearish for the yellow metal. The renewed hope in Trump’s tax reform and the speculation that Trump could nominate hawkish John Taylor to the Board of Governors of the Federal Reserve will also act as headwinds for the gold market. Anyway, today, Spain’s control over Catalonia will be tested. Stay tuned!

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.

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