The Hollande Effect

| About: SPDR Gold (GLD)

Investors are speculating on what will happen when François Hollande becomes president of France. Many things can occur, but here are the most prominent ones.

François Hollande is a socialist as opposed to current French president Nicolas Sarkozy. This means that more money will be re-routed from the public to social security and the likes. This money is of course being "created" by higher taxes. As such, Hollande is proposing a 15% corporation tax increase for the banks. This measure will likely mean less profits for the French banks. The three most affected banks will be BNP Paribas (OTCQX:BNPQY), Societe General (OTCPK:SCGLY) and Credit Agricole (OTCPK:CRARY). Their earnings could drop by 10% for 2013. Another example of Hollande's socialist views is the 75% tax rate for people earning more than $1.3 million a year.

On the flip side though, Hollande is less conservative than Sarkozy. Hollande will likely promote more ECB money printing as he is against austerity measures. Instead, he is going for growth through monetary easing, government stimulus, higher taxation and devaluation of the euro. It's highly unlikely that these measures will spur growth because higher taxes on corporations will destroy the private sector. Nevertheless, in Hollande's Keynsian mind it will. But this view is in stark contrast with Germany.

Political tensions will rise between German chancellor Angela Merkel and François Hollande as Merkel is advocating austerity and monetary discipline, while Hollande isn't. Merkel is strictly against creating Eurobonds (much like the U.S. treasury notes), while Hollande is proposing the introduction of Eurobonds. Of note is that Hollande is against stricter budget discipline on the French balance sheet and he condemns "saving for saving's sake". He will try renegotiating the "Merkozy" austerity measures (which were aimed to rein in budget deficits in the eurozone) and will even veto the austerity deal if necessary.

It is very difficult to predict what the future will bring, but one thing is certain. When Hollande comes to power, the euro will be debased with certainty. At this moment records of euros are flowing out of European banks and going into gold, anticipating a decline in the euro. This path is likely to be continued when Hollande becomes the next French president.

As an investor I would continue to sell French banks and put that money into gold (NYSEARCA:GLD). Gold has been going down in U.S. dollars as everyone knows by now, but gold is still rising in euros and there is a reason for that (Chart 1). I call this "the Hollande Effect".

Gold prices in euros were at 40361 euro/kilo but rose to 40550 euro/kilo after Hollande became president of France.

click to enlarge

Chart 1: Gold Price in Euros

Disclosure: I am long PSLV, GLD, PHYS, SLV, AGQ.