Over the last few weeks all eyes have been on Italy as it endures economic and political turmoil. In particular, investors have been watching the price of gold, which has risen in response. The Italian president prepared the country for elections, recruiting an interim or temporary prime minister that was formerly a member of the International Monetary Fund.

Italy’s Role in the European Union

Italy has historically been one of the strongest countries in Southern Europe. Its production of food, jewelry, high end fashion and automobiles has given it considerable prosperity, and in recent years it has diversified into telecommunications and other related fields. However, investors are concerned about the upcoming elections, which could decide whether or not Italy stays in the Euro zone.

Italy is saddled with tremendous debt, and as the eighth biggest economy in the world, if the situation is not resolved it could have a serious effect on the world economy. Italy’s debt ratio is one of the worst in Europe, only being surpassed by Greece. In recent years Italy has also suffered from lower productivity, a result from increased competition in Asia.  While the Northern part of Italy is highly productive, having a GDP which is about 40 percent higher, Southern Italy has tremendous unemployment, which translates to increased labor from the black market.

When compared to other European countries, Italy has extensive regulation, with only a small portion of its revenues being invested in research and development. This combined with the fact that the economy is heavily dependent mostly on small to moderate sized businesses means that it doesn’t have a robust capital market.

A number of prominent Italian figures are skeptical of the country’s involvement in the EU, feeling that it hurts rather than harms them, while others feel EU membership makes Italy stronger. In any event, the uncertainty of the situation has strengthened gold to a noticeable degree.

How Gold Has Responded To The Italian Crisis

Spot gold rose about 0.4 percent, reaching just over $1303 per ounce, while American gold futures for the month of June declined by about 0.1 percent. This is believed to have been the result of a stronger U.S. Dollar, which has rose in response to the crisis in Italy.

At the moment, gold is hard pressed to make a significant move, either up or down. The situation in Italy is serious and the global markets are reflecting investor uncertainty, normally gold should have risen higher, but the strength of the green back is putting a lid on it. Another phenomenon that is influencing gold prices is Italian bonds.

Although these bonds were short dated, they produced a high yield, and this usually has an effect on gold prices. Additionally, markets worldwide are still awaiting news related to inflation data within the United States, which would provide insights as to how interest rates would increase in the future. The U.S. dollar is enjoying its highest gain in about a year and a half.