A major blow to the EU! The populist Five Star Movement won about one-third of the votes in the Italian general elections. It’s another negative shock for the European establishment. Will these stars shine on gold?

Five Stars Movement Triumphs

We live in strange times. To be a hairstylist, you need a license. But you can become a politician being just a comedian and telling jokes. We refer here to Beppe Grillo who co-founded the Five Star Movement a decade ago. Although the party was initially perceived as a harmless prank, it quickly became a serious threat for mainstream politicians in Italy. In 2013, it reached 25.55% of the vote, introducing 109 out of the 630 deputies in the Parliament. It would obtain even more members, but it refused to form a coalition. Fast forward to 2018 – the Five Star Movement won about one third of the votes. It means that it will likely be the largest single party – and the pillar of the next legislature.

Another Hung Parliament?

However, a center-right bloc – which includes the Forza Italia party of former Italian prime minister Silvio Berlusconi famous for his sex parties – attracted about 37% of the votes. The center-left coalition built around the ruling Democratic party, led by another former prime minister Matteo Renzi, got only about 23% of votes. The results imply that no party won 40% of the vote, which would have allowed it to form a government outright. So we could have a hung parliament (especially that the Five Star Movement in principle opposes a coalition with other parties), which would add to the political uncertainty about Italy – and the whole Eurozone.

Eurosceptics Win Again

The results also mean that the eurosceptic and nationalistic parties have strengthened their hands. After Brexit, Trump’s victory, Le Pen’s advance to the second round of the French presidential election, populists took Italy. For example, the League, which has campaigned on an anti-immigration stance, ended with a higher share of the vote than Berlusconi’s Forza Italia. It was a negative surprise for Italy’s financial markets. Stocks declined, while the yields on sovereign debt rose.

Implications for Gold

The Italian election could affect the gold market via two channels. First, it could increase the safe-haven demand for the yellow metal, as the vote strengthened the populist parties. As a reminder, Italy is the Eurozone’s third-largest economy, struggling with a high debt-to-GDP ratio (see the chart below) and a vast amount of non-performing loans. The triumph of eurosceptics could add to the uncertainty about the economic future of Italy.

Chart 1: Italy’s government debt to GDP ratio from 1988 to 2018 (as %).

Second, the results may also affect the euro/U.S. dollar (EUR/USD) currency pair exchange rate and, thus, the price of gold. So far, the euro has declined, but rebounded quickly, as one can see in the chart below. However, given the surprising results, we could see declines in the short run. It would be negative for gold prices.

Chart 2: EUR/USD exchange rate over the last three days.