Gold prices fall as dollar rises on European elections

Results of European elections suggest changes in political strategy

Gold has traded lower in four of the past five sessions. The yellow metal continued in a pattern of “erosive” trading. It has been caught in a range between $1,630 and $1,680 an ounce, and is likely to break to the downside.

The losses for gold came as the U.S. dollar index, which measures the performance of the greenback against a basket of other currencies, rose in the past few days.

Strength in the dollar puts pressure on dollar-denominated commodities, because it makes them more expensive for holders of other currencies. A firmer U.S. dollar, which also rose significantly against the euro in the wake of the elections in France and Greece during the weekend, is weighing on the gold price.

In France, voters ousted incumbent President Nicolas Sarkozy in favor of Socialist challenger François Hollande, while in neighboring Germany, Chancellor Angela Merkel’s coalition suffered defeat in a state election. Merkel, working closely with Sarkozy, has been a strong proponent of austerity for the euro zone as a way out of the long-running debt crisis, while critics such as Hollande have emphasized the importance of boosting growth at a time when many European nations are sliding into recession.

In Greece, many voters backed fringe parties, rejecting the nation’s two major political parties, which had supported tough austerity measures. The election may result in political deadlock as parties are unable to agree on forming a governing coalition.

Political changes in Europe supporting different government strategies diminish the safe haven appeal of gold in the long run. However, possible prolonged government restructuring and traditionally slower summer business season in Europe may support gold prices until October.

By the end of the past week, gold price rose slightly, but still ended 1.2% down on weekly basis. The broader suite of metals futures tracked gold lower.