Gold is back as a safe haven, says Andrew Su, CEO of Australian brokerage firm Compass Global Markets.
“Over the past year, gold has only moved in reaction to expectation of quantitative easing, but historically it has reacted to everything from conflict, political turmoil and falling share markets,” Su told CNBC. “Only this week it has started to rally on the back of negative developments out of Europe. We see gold’s safe-haven status coming back to the fore.”
Stocks dropped and safe havens including the yen and gold rallied Monday following Italian election results that many fear will create political gridlock, snuff out economic reforms and bring back the eurozone debt crisis.
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Political stalemate is already in abundance in the United States where Congress is unable to reach a deal to avoid severe across-the-board budget cuts scheduled to start March 1.
But political stalemate may be good news for gold.
“If gold stays above the important technical level of $1,530 over the next few weeks, then it could go to $1,900 over the next few quarters,” Su said.
After peaking just below $1,800 last October, gold has been falling.
Regulatory filings revealed that major gold investors, including George Soros, were selling gold at the end of last year over fears of a bubble, which helped prompt a sell off, according to CNBC.
However, Tony Farnham, an economist at Paterson’s Australian Stockbrokers, believes fundamentals do not support a long-lasting gold rally.
“Yes, it’s true that when volatility increases people always look to gold,” he told CNBC. “But the strong U.S. dollar is cramping the ability for investors to buy it at the moment.”
None the four major parties managed to win a clear majority in the Italian elections. Former Premier Silvio Berlusconi and Beppe Grillo, candidates running against austerity, scored about 55 percent of the popular vote.
Italy’s political structure makes gridlock more likely, according to Slate. Italy has a bicameral system like the United States, but it also has a parliamentary system. Unlike most parliamentary systems, the prime minister and cabinet must have confidence of both houses of parliament to govern.
While inconclusive elections results could mean gridlock in the United States, “in Italy, it’s worse — it’ll mean you can’t form a Cabinet at all,” writes Slate business and economics correspondent Matthew Yglesias, warning that a stalemate could mean a return of the eurozone debt crisis.
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