Gold prices rose on Tuesday, as a deepening political crisis in Italy that provoked a second day of heavy selling on European financial markets.
Italy’s president set the country on a path to early elections on Monday, appointing a former International Monetary Fund official as interim prime minister with the task of planning for snap polls and passing the next budget.
Investors fear repeat elections – which could take place as soon as August – might serve as a quasi-referendum on Italy’s role in the European Union and euro zone and strengthen the country’s eurosceptic parties even further.
Gold, seen as a safe haven, often gains from political turmoil.
But keeping the metal’s upside in check, the events in Italy pushed the dollar to a 10-month high versus the euro, making US dollar-priced gold costlier for non-US investors.
Spot gold gained 0.18 per cent at $US1,300.01 per ounce, earlier hitting a five-day low of $US1,293.40, while US gold futures for June delivery settled down $US4.70, or 0.4 per cent, at $US1,299 per ounce.
Markets are approaching a massive risk-off event, said Shree Kargutkar, vice president and portfolio manager at Sprott Asset Management.
‘Traders have begun buying the US dollar versus the euro, sterling, as well as (emerging market) currencies, which explains why the US dollar has been rising,’ he said. ‘Gold has been behaving exceptionally well when measured across various major currencies and it continues to maintain an uptrend against the US dollar as well.’
Short-dated Italian bond yields, a gauge of political risk, soared to their highest since late 2013 in their biggest move in 26 years, weighing on gold.
Adding to uncertainty in Europe, Spanish Prime Minister Mariano Rajoy will face a vote of confidence on Friday.
Elsewhere, markets are awaiting US inflation data due this week that could provide clues to future interest rate increases ahead of the June Federal Reserve policy meeting.
Higher US interest rates make non-yielding gold less attractive to investors.
‘Beyond politics, we still see the US rate cycle and US dollar in the driving seat for gold. This should keep a lid on prices for now and supports our short-term neutral view,’ Julius Baer analyst Carsten Menke said in a note.
Spot silver lost 0.5 per cent at $US16.38 an ounce, earlier hitting $US16.28, an eight-day low.