Gold To Fall Below $1,300 Even With Italian Turmoil In Play - Strategist
(Kitco News) - Gold could be looking at a bearish year-end scenario, with one strategist stating that even a drop to $1,200 would not surprise him despite intensified geopolitical tensions, including a possible summer election in Italy.
“I expect gold to continue to go down. We’ve set a major top around $1,350. Critical support is right around $1,290 and I expect [gold] to break that, which would expose $1,260 and $1,230 levels,” Ilya Spivak, senior currency strategist for Daily FX at IG, told Kitco News in an interview on Tuesday. “I wouldn’t be surprised if gold ended this year around $1,200.”
Gold prices briefly flirted with the $1,306 level on Tuesday following reports that Italy’s President Sergio Mattarella could dissolve parliament in the next few days and call for another election as early as July 29.
The news came after Carlo Cottarelli, interim prime minister and former International Monetary Fund official, reportedly failed to secure support from major political parties. Italy has been unsuccessfully trying to form a government since the inconclusive election in March.
“The main concerns at this point are that the next election will become a referendum on the euro, that [the League and the Five Star Movement] parties are going to push for a more explicitly eurosceptic position, and that they could score a bigger mandate,” Spivak pointed out.
Tuesday’s market reaction was the biggest in response to Italy’s uncertainties so far and had to do with markets’ changing risk perceptions, according to Spivak.
“The most interesting aspect of this story is that the markets cared this time, while they did not in 2016 when the [centre-left] Renzi government folded after that unsuccessful referendum in changing the constitution,” he said. “The reason the markets care now is because this year we will see quantitative tightening for the first time in a decade. Starting at about mid-year, the amount that the Fed is rolling off its balance sheet will exceed the amount the ECB is adding to its balance sheet.”
Here's why investors shouldn’t get caught up in #gold rallies - expert panel | @DanielaCambone @caseyresearch @Explor_Insights #aurynresources #imic18 https://t.co/WHtZKe6SC9 pic.twitter.com/hI9lPMTkZK— Kitco NEWS (@KitcoNewsNOW) May 29, 2018
But, the new elections in Italy and a risk of fresh eurozone crisis are not enough to drive gold prices higher, Spivak added.
“What you have here is falling yields that help gold and rising dollar that hurts gold, so gold is stuck between these conflicting forces,” he said. “U.S. dollar is a liquidity haven and that hurts gold, which acts as an alternative store of value to paper currency.”
Spivak compared Italy’s situation to that of Greece, when leftist Syriza party was forming a government in 2015, describing Italy’s predicament as “not an existential threat” to the eurozone.
“The example of Syriza in Greece is very telling here. There was a lot of back and forth between Syriza and Brussels and the IMF [International Monetary Fund]. Ultimately, they had to do what Brussels and the IMF demanded because they needed money,” Spivak said. “Money will be a source of leverage for the IMF and Brussels and that will ultimately walk the populist parties off the ledge as it were when it comes to exiting the eurozone.”