Traders remain divided about gold.
Some believe it’s going sharply lower. Others say it’s already in a bull market. The truth is, the yellow metal isn’t in a bull market yet. But that could change later in the year.
There are plenty of reasons to be positive…
Trade wars. Rising US interest rates, as discussed last week. And the prospect of a major war breaking out in the Middle East are a few worth mentioning. Don’t forget the witch hunt against US President Donald Trump either. Or the movement towards anti-establishment parties across Europe.
It’s the perfect storm for gold.
It couldn’t have been more obvious…
Here’s a snippet of Gold & Commodity Stock Trader from 12 April:
‘I’m not surprised there’s a growing movement towards anti-establishment parties across Europe. I argued why Northern League and Five Star Movement could form the next Italian government on 8 March. If that happens, contrary to most mainstream views, I believe Italy will hold a referendum to leave the Eurozone this year.
‘If Italy votes to leave, which looks likely given the election results (over 50% of people voted for anti-establishment parties), we could see gold finally break out into a bull market state later in the year. Remember, when Britain voted to leave the European Union, gold shot up US$100 per ounce in a day.’
When we sounded the alarm bells about Italy, most analysts at global investment banks were in denial.
The Financial Times wrote on 11 March, for example, ‘One veteran Italian banker argues there is only a 10 per cent chance that Mr Mattarella [the country’s president] will hand government over to Five Star’s leader, Luigi Di Maio, or Matteo Salvini of the League’.
Times have changed.
Express.co.uk wrote last week:
‘The Five Star Movement and Lega’s attempts to form a new government faltered after the Italian President Sergio Mattarella vetoed the proposed choice of finance minister, Paolo Savona, an 81-year-old Euro-sceptic economist.
‘Luigi Di Maio, the leader of the 5SM, commented on Mr Mattarella’s action, stating: “We were a few steps away from forming a government and we were stopped because in our cabinet there was a minister who criticised the EU.
‘“This is not a free democracy.”
‘But following the collapse of the coalition talks a snap election in July appears increasingly likely, and polls suggest the populist parties are on course to win outright.’
A lot has changed since that article. But it’s worth discussing the past. Euro-sceptic parties hold the balance of power in Italy.
50% of people voted for them at the last election.
Five Star Movement (5SM) won 32.6% of the vote. It became Italy’s single largest party. Former Premier Silvio Berlusconi‘s Forza Italia (Go Italy!), and its ally, the far-right anti-immigrant Northern League (led by Matteo Salvini), emerged with the largest block of votes.
The market thought the two parties wouldn’t merge.
It was dead wrong.
Berlusconi gave his blessing last month.
Italy’s President Sergio Mattarella didn’t originally agree with the move, however. He’s a left-wing socialist in favour of big government. Mattarella vetoed the original choice of finance minister, Paolo Savona. Savona is an 81-year-old Euro-sceptic economist. He called the euro a ‘historic mistake’. If Savona got into a position of power, it would suggest a break-up of the European Union.
5SM and Northern League went back to the whiteboard to avoid another election. It agreed on a new candidate last Friday. Giovanni Tria ― an unknown economics professor took the job.
Sergio Mattarella gave his blessing over the weekend.
The clock is ticking
CNBC reported on the story yesterday:
‘The new government is largely critical of Brussels and this is what worries euro zone officials. They are wary of a debt-ridden Italy overspending and, crucially, abandoning EU fiscal rules as Lega and M5S have signaled they could do. The embattled euro zone nation has a debt pile of around 2.3 trillion euros ($2.7 trillion) and a debt-to-gross domestic product ratio of around 130 percent.
‘The new Italian government should tread carefully with Europe, [Carlo Cottarelli, an economist and former director of the International Monetary Fund] said, if it wanted to be listened to.
‘”If you go to Europe and try to shout — and try to get what you want by shouting — I don’t think that will be accepted very well. But if the new Italian government goes to Europe and tries to present the Italian case, perhaps more forcibly than in the past but in a reasonable way, perhaps they (Europe) will react favorably,” he told CNBC Class in Italy.’
Italy’s ultra-right-wing politicians are ― more so than other countries ― extremely patriotic. I believe they are likely to leave the EU. But probably not this year; although the situation could escalate negatively.
Remember, both Five Star Movement and Northern League want to renegotiate the country’s policies with the EU. But the chances of a positive result are slim, considering what happened with Greece in 2015. EU bureaucrats believe they can dictate to member states. But that probably won’t go down well with current Italian government.
My view is simple: expect a referendum to leave the EU later within 12 months. Talks are highly likely to breakdown at some point. It’s merely a question of when that will happen. That spells ‘trouble’, and could drive gold higher. If you aren’t buying junior gold stocks, now is the time to start.
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