Will Portuguese Socialists Support Gold?

A coalition of leftist parties who are against austerity has effectively ousted Portugal’s center-right government just few days after it took power. What does it imply for the gold market?

The surprising alliance of leftwing parties (moderate center-left Socialist party, Communist party and the radical Left Bloc) is now expected to form a new government which would likely focus on fighting with economic austerity.

As a remainder, Portugal was severely hit by the crisis in the Eurozone, and it was bailed out in 2011 with Ireland and Greece in exchange for austerity measures. The economy fell in recession for three years, which caused high unemployment (currently at 11.9 percent) and spurred a large wave of emigration.

How may the situation in Portugal affect the gold market? Well, the left-wing coalition risks turning Portugal into another Greece. The new government would be less radical (Portugal’s Communists and the Syriza-allied Left Bloc would play a supporting role in the government led by a more moderate Socialist Party), but its program could place Lisbon on a collision course with the European Commission and could lead the country to bankruptcy.

Indeed, Portugal has extremely high debt levels, with the interest rate burden higher than in Greece. Public debt is 130.2 percent of GDP, while the total non-financial debt is 370 percent of GDP, one of the highest in the world, just after Japan. Thus, the country remains vulnerable to any external shock and there could be a new crisis in the next couple of years. And investors should not forget that the change of regime in Lisbon could strengthen the leftists forces across southern Europe – there are elections in Spain next month. All these factors should increase safe-haven demand for gold.

On the other hand, the shiny metal did not get a significant boost during the very recent Greek debt crisis. It seems that gold investors are now much more concerned about the Fed’s actions than problems in some peripheral countries. The markets believe that the Eurozone will help Portugal if something goes wrong (or that it will transform the new government into its puppet, as it did with Alexis Tsipras, the Greek Prime Minister) and that the country’s problems would be limited and would not cause contagion effects. Such expectations are not likely to significantly support the price of gold.

The key takeaway is that there may be a leftist and anti-austerity government in Portugal, which could transform the country into a new Greece. This would be negative for the Portuguese and would increase political risk in the Eurozone, however, it should not significantly affect the gold market. Investors have to wait for general elections in Spain – they should be more important.

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Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor