Precious metals outlook 2017

By Clint Siegner*

Precious metals had a wild ride in 2016, launching higher in the first half of the year and then falling much of the way back to earth in the second half. Our outlook for 2017 hinges on some of the drivers that figured prominently in last year’s trading. There are also a couple of new wrinkles.

Europe

We’ll start with some fundamentals that metals investors have become well acquainted with in recent years. The troubles plaguing Europe seem to be forgotten, but they certainly aren’t gone. The question is whether or not officials in Europe will be able to keep the wheels on in 2017.

Several major European banks remain in jeopardy, plagued by bad debts, too much leverage, and mounting legal expenses. Germany’s Deutsche Bank (DB) was often in the headlines last year as its share prices made all-time lows. Deutsche Bank paid out $60 million to settle charges of manipulating the gold market.

Tattered EU Flag

In addition, regulators in the U.S. had proposed a crushing $14 billion fine related to the bank’s marketing of dodgy mortgage backed securities prior to the 2008 financial crisis.

Since then share prices have recovered significantly. The bank agreed last month to a settlement of just over $7 billion, roughly half the amount originally proposed but still a hefty penalty. The bank’s loan book still looks ugly and its exposure to risky derivatives remains a wild card.

The recent failure of Italy’s third largest bank – Monte dei Paschi – may put the spotlight back on the European banking sector. Particularly if other institutions, such as Deutsche Bank, have been aggressively selling credit default swaps they will now have to pay out on.

Investors grappled with the Brexit referendum in 2016. This year they will find out if Britain’s vote to leave the EU will actually get implemented. Negotiations around the departure are expected to commence in May.

Italians are going to select a new government shortly and there are elections coming up in Germany, France, and the Netherlands in the months ahead. Anti-European Union forces are making real headway in the polls.

This year looks pivotal for the EU, the euro as its currency, and its banks. Turmoil there will boost safe haven buying in precious metals and the U.S. dollar. Alternatively, should the establishment and the banks weather the storm, metal prices could suffer, at least in terms of euros. Right now, turmoil in Europe looks like the better bet.

The Fed

Once again markets enter a new year in thrall to Janet Yellen and the rest of the Federal Open Market Committee. Like last year, we just had one rate hike. Officials are telegraphing three to four additional hikes in the coming 12 months.

Last time around the stock market suffered stimulus withdrawals. Fed officials threw in the towel and reversed course almost immediately. We can expect officials are watching equity prices carefully now. If the S&P 500 keeps powering ahead, they’ll have the cover they need to deliver rate increases.

United States Federal Reserve System

If, on the other hand, we find out that markets are still addicted to low rates and officials can’t tolerate the pain of a withdrawal it will be bad news for the dollar and good news for metals.

A Donald Trump Presidency

The election of Donald Trump is what makes this year different. Many people are optimistic about the prospects for a major infrastructure program, tax cuts, and less regulation. Investors are ready to take on risk. Since the election, they have been mostly getting out of safe haven assets such as bonds and gold, while paying top dollar for stocks.

The rub is that Trump has yet to assume office. The expectations are high and, frankly, something has to give. Trump might deliver a big infrastructure program and some tax relief. However, that would spell trouble for the current dollar rally as people anticipate ballooning deficits and borrowing.

Or, Trump may find his proposed measures are easier said than done. Republicans control Congress, but there is no certainty they will accept big spending increases and even higher deficits. If optimism bumps up against a bleaker political reality, it’ll be bad news for investors playing the Trump rally.

Conclusion

2016 closed with investors positioning for smooth sailing and economic growth. They may get it but a number of things will have to go right. If they don’t, jettisoning safe haven assets to buy stocks at record high valuations won’t look like a very good idea.

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Italian referendum : Gold confounds – again

Here’s a lightly edited version of my thoughts on gold’s contrary reaction to the result of the recent Italian referendum which led to the resignation of Italian Prime Minister Matteo Renzi.  Article was published on SharpsPixley.com (I publish articles on Sharps Pixley as I generate a small amount of income whereas I have not tried to commercialise lawrieongold which comes to you free of charge.)

I suppose we should have expected it after the Brexit vote and the Donald Trump US Presidential vote result, but yet again a plebiscite, whose result would normally have been expected to give a significant boost to the gold price appears to have had the opposite effect.  This time it was the Italian referendum which saw a significant defeat for would-be reformist Prime Minister, Matteo Renzi, and his as-promised subsequent resignation.  True, as with the Trump and Brexit votes, once it became apparent which way the results would go, the gold price spiked upwards, but then it was brought down sharply as global markets opened giving further fuel to the conspiracy theorists claims that the financial and governmental elite is working in concert to suppress the global gold price. (Ed Steer who picked the article up in his own newsletter calls it conspiracy fact! – for details on his service click on edsteergoldandsilver.com )

The problem for gold is that strength in the yellow metal’s price is generally seen as recognition that the global economy is indeed in a parlous state and neither the big money, nor the politicians, want to see this interpretation gain public credence.  For the former it would mean a market collapse, perhaps of epic proportions, destroying wealth, and for the latter it would damage the carefully orchestrated perceptions that all is well with the global economy, despite plenty of indicators that this is not the case – not least the debt mountains which have been built by many of the world’s major economies.

Modern day politics is all about perception.  If people can be led to believe that all is well they will continue spending at levels that will indeed help the economy.  In the U.S. for example there is plenty of evidence from non-massaged statistics, that the average person is worse off than they were a few years ago – in some cases substantially so.  Yet we have just seen a consumer spending splurge on Cyber Monday which has broken all records.  This is obviously unsustainable, but how long will it be when this perception that all is well with the world is just a myth is understood by the majority of the general public?

In part the Italian, US and UK votes  highlighted above may also signify that this comfortable existence may indeed be on the way out, albeit perhaps just the beginning of such perception.  All three are being seen as votes against the establishment, but in no case has the majority been large enough to carry much more than 50% of the vote (less in the case of the Trump victory) so there is still a very substantial number of people out there apparently still happy with the status quo.  The ‘protest vote’ will have to grow much further if we are to see any serious perception change.

Part of the underperformance of gold against expectation after the Italian result has been put down to dollar strength, given a sharp fall in the euro as the result was confirmed  which is seen as having the potential to upset the euro applecart and precipitate an Italian  banking system meltdown with a correspondingly adverse impact on the whole European banking sector to which the Italian banks are severely in debt.  But the resultant dollar strength has been shortlived, while gold has remained well down on its Friday close – despite Shanghai trying to give it a boost with a pm gold benchmark price, as calculated by kitco.com, of $1,198.11 – over $20 higher than the Globex spot price at the time.

Negative interest rates:  Great for gold but are they any good for the economy?

Central Banks have been viewing ultra-low, or in many cases directly, or effectively, negative, interest rates as being the panacea for all economic ills.  Deprive savers of interest, so the theory goes, and they will opt to spend their savings instead, thereby generating a boost for the economy.  Low interest rates also make borrowing costs lower for industry and, with supposedly additional availability of capital through quantitative easing programmes should thereby boost investment in necessary plant and equipment.

It is becoming more and more apparent that neither of these strategies are working, or at least not to the extent anticipated by the economists promoting this policy which is, unfortunately, being followed by many of the world’s major central banks.

From the savings angle, what the policy is really doing is driving savers away from traditional income generating securities and into assets like gold which may pay no interest – no interest is better than negative interest – but offers the possibility of capital accumulation.  Those in countries like the UK, where the currency first weakened against the US dollar post the Brexit vote, and then again when the Bank of England cut the base rate and re-introduced monetary stimulation, will have seen some substantial gains through moving into gold.  We advised, (See:UPDATE: Brexit in the balance.  Gold surges.  Silver may begin to fly where I commented “UK investors in particular should look to investing in gold as a wealth protector given that if the UK referendum, now only a week away, should result in a Leave vote – the Brexit option – there would be a knee-jerk reaction knocking the pound sterling down sharply against the dollar, while the gold price would likely rise on fears of considerable further economic disruption within the Eurozone ahead of the Brexit vote”) for UK investors to at least put some of their investments into gold for example as insurance against a ‘Leave the EU’ decision, and those who did benefited very nicely indeed, thank you, at least in terms of the pound sterling. The combination of the rising gold price in US dollars and the fall in sterling against the dollar had a multiplying impact on an investment in gold or in silver.

On the business front there’s little evidence that the huge move towards zero, or negative, interest rates has done much to stimulate activity.   Businesses are seen as reluctant to borrow, even when the cost of borrowing is so low, to put money into new plant and equipment, or services, when demand for their products is not seen as being positive in any case.  For many the imposition of such low interest rates is seen as yet another indication of a sick economy and an ultra low-growth environment.

Among the nations which have moved to the imposition of negative interest rates are, most significantly, the European Central Bank (ECB) and the Japanese Central Bank (BoJ), while Denmark, Sweden and Switzerland have also followed suit.  The Bank of England (BoE) is almost there too and with the prospect of another rate cut should the post-Brexit economy not pick up, could be in zero, or negative, territory by the year end.  And with inflation probably running higher than most governments will admit, all these, and more including the USA, are effectively in a below zero environment as far as bond investment returns are concerned.  All this is positive for gold, but of increasing worry for the Central Banking system which seems to have little more ammunition left with which to try and stimulate flagging global economies.

Just to emphasise the problem a recent survey, published in the UK’s highly respected Financial Times newspaper suggested that the universe of sub-zero-yielding debt – primarily government bonds in Europe and Japan but also a mounting number of highly-rated corporate bonds – has reached the enormous total of $13.4 TRILLION.

Another factor which is indeed worrying for businesses and which could see them look to deposit any spare cash in alternative investments is the looming possibility of bank bail-ins, whereby large holders of money in the banking system see some of their hard-earned cash effectively confiscated to help rescue an ailing bank.  This was brought to the fore a couple of years ago in Cyprus when a bail-in was imposed for major clients of the Bank of Cyprus which was close to failure because of its large holdings of Greek debt.  As the UK’s Daily Telegraph reported at the time: The imposed bail-in forced big savers to foot the bill for the recapitalisation of the nation’s biggest bank.  The bank said that it converted 37.5% of deposits exceeding €100,000 into “class A” shares, with an additional 22.5% held as a buffer for possible conversion in the future. Another 30pc was temporarily frozen and held as deposits.

Legislation was subsequently changed to permit bail-ins of this nature across the EU and now the spectre of something similar occurring in Ireland has been reported with one of the country’s biggest insurers said to have been moving its cash holdings out of the banking system into government bonds for fear of another property price crash putting the Irish banking system in peril.

There is thus something of a confluence in factors which would seem to be gold supportive in the medium term, while the increase in geopolitical tensions between the Ukraine and Russia, and China’s belligerent rhetoric over its de facto annexation of large sections of the South China Sea, and the uncertainties engendered by perhaps the most politically divisive US presidential election ever, is further adding to the positive environment for the gold price.  Whether the markets will recognise this after the Labor Day holiday, when the US traders, bankers, fund managers et al are back from their holidays, which has seen something of a volatile marketplace for precious metals over the past month, remains to be seen as there are a lot of big vested interests at play here, but we do see the overall pricing environment as distinctly positive.

Gold picks up a little after BoE drops interest rates, adds stimulus

Gold TodayGold closed in New York at $1,358.10 on Wednesday after Tuesday’s close at $1,364.50.  

    • The $: € was up at $1.1135 from $1.1197.
    • The dollar index rose to 95.67 from 95.09 Wednesday.
    • The Yen was weaker at 101.48 from Wednesday’s 101.06 against the dollar.
    • The Yuan was weaker at 6.6409 from 6.6291 Wednesday.
    • Yuan Gold Fix

 

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  08  4

2016  08  3

SHAU

SHAU

289.78

291.04

289.08

291.42

Dollar equivalent @ $1: 6.6409

$1: 6.6291

$1,357.22

$1,365.55

$1,353.94

$1,356.11

Shanghai prices saw prices consolidate at lower levels ahead of the Bank of England’s statements today. But the main driver of the day was a correcting U.S. dollar in what we see as a normal market reaction to its recent weaknesses.

LBMA price setting:  $1,351.15 after Wednesday 3rd August’s $1,364.40.

The gold price in the euro was set at €1,213.75 up €4.46 from Wednesday’s €1,218.21.

Ahead of the opening in New York the gold price stood at $1,356.90 and in the euro at €1,219.03, but moved back up to over $1,360 as trading progressed.

Silver Today –The silver price closed in New York at $20.41 on Wednesday down from $20.61 on Tuesday.  Ahead of New York’s opening the price was trading at $20.32, but again silver advanced during the day to stand at around $20.38 at midday in New York.

Price Drivers

The Bank of England lowered interest rates by 0.25% and said it had scope to do more if needed, including taking the key rate close to zero, they also announced a plan to lend as much as £100 billion ($132 billion) to banks to ensure the measures reach the real economy. In addition, the Monetary Policy Committee will buy £60 billion of government bonds over six months and as much as £10 billion of corporate bonds in the next 18 months. In total, the balance sheet could expand by £170 billion.

The bank cut its growth forecast for next year to 0.8% from 2.3% and lowered its 2018 prediction to 1.8% from 2.3%. The pound dropped over a percent to $1.3135 immediately after the statement, but this still higher than its level immediately post the Brexit vote..

The dollar’s performance is largely going unnoticed as it continues to trade between 95 and 97 on the dollar index. On the basis of its economy’s performance it should be much stronger. On the basis of its Trade balance the dollar should have collapsed long ago, but the U.S. accounts as the dominant world power which has made the dollar a haven for all other currencies. But this situation is starting to change as its role as the sole currency with which to pay for oil is changing, as is its role as the last resort currency haven. The credibility of currencies as the monetary expression of government is weakening in line with the destabilization of the monetary world.  Gold is not a monetary alternative for many reasons, but it is a vehicle with which to shore up confidence, particularly if it can be eliminated as competition to currencies.

Gold ETFs – In New York on Wednesday there were sales of 0.052 of a tonne sold from the SPDR gold ETF but no change in the Gold Trust holdings. This left their respective holdings at 969.648 tonnes and 219.65 tonnes.

Silver –Silver prices were more cautious today than gold prices ahead of the Bank of England’s announcement.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance [Gold Storage geared to avoid its confiscation]

Will the Gold Bull be Back after the Summer is Over

By Frank Holmes, CEO and Chief Investment Officer for US Global Investors

Donald Trump accepting the Republican nomination for president this week

Looking more Las Vegas casino than Oval Office, the stage Donald Trump delivered his nomination acceptance speech from Thursday was all gold, from the stairs to the podium, completely befitting of his showman-like style. Whether you support or oppose Trump, it’s time to face reality. This is really happening, and we should all brace ourselves for what will surely be one of America’s messiest, ugliest general election seasons.

Only time will tell which candidate will be triumphant in November, but in the meantime, one of the winners might very well be gold, which has traditionally attracted investors in times of political and economic uncertainty. In the United Kingdom, which voted one month ago to leave the European Union, gold dealers are seeing “unprecedented” demand, especially from first-time buyers. Some investors are reportedly even converting 40 to 50 percent of their net worth into bullion, though that’s not advisable. (I always suggest a 10 percent weighting, diversified in physical gold and gold mining stocks.) In Japan, where government bond yields have fallen below zero and faith in Abenomics is flagging, gold sales are soaring.

It’s not unreasonable to expect the same here in the U.S. between now and November (and beyond).

Strong U.S. Dollar and Treasury Yields Weighing on Gold

More so than the upcoming election, gold prices are being driven by U.S. dollar action, interest rates and low-to-negative bond yields around the world. (Between $11 trillion and $13 trillion worth of global sovereign debt currently carries a negative yield.) Right now the yellow metal is in correction mode on a strengthening dollar and rising two-year and 10-year Treasury yields, both of which share an inverse relationship with gold.

Gold Corrects on Rise of 10-Year Treasury Yield
click to enlarge

It’s also worth mentioning that the summer months have historically been among the weakest. By contrast, some of the highest gold returns of the year have occurred in September, when the Love Trade heats up in India in anticipation of Diwali and the wedding season.

Gold's Average Monthly Gains and Losses, 1975 - 2013
click to enlarge

For the past several trading days, gold demand had also been overshadowed by a hot equities market, with many stocks hitting 52-week highs. Both the S&P 500 Index and Dow Jones Industrial Average closed at all-time highs, twice in the latter’s case. The CNN Fear & Greed Index, which measures investor sentiment, is currently in “Extreme Greed” mode, at more than a two-year high.

Markets in Extreme Greed Mode

With gold taking a breather, now might be a good buying opportunity. Since 1970 there have been only four major gold bull markets, and the consensus among analysts right now is that we’re in the early stages of a new one, with end-of-year forecasts in the $1,400 an ounce range.

Learn more about what’s driving gold.

Rumors of Brexit’s Negative Impact Have Been Greatly Exaggerated

Despite gold’s correction, the metal got a boost last Thursday courtesy of Mario Draghi. The European Central Bank (ECB) president, as expected, announced that euro area interest rates and asset purchases would remain unchanged as economic ramifications of the Brexit referendum continue to be assessed.

Speaking of Brexit, Draghi noted that markets have met the volatility and uncertainty in the month following the U.K. referendum with “encouraging resilience.” Like many others, he had predicted that Brexit would dramatically stunt euro growth, but as we’ve already seen, such claims are overdone. In a note released last week, securities trading firm KCG wrote that June 24, the day following the British referendum, “was no repeat of August 24,” a reference to the “flash crash” that struck equities last summer and led to ETF mispricing.

Last week, the International Monetary Fund (IMF) trimmed 0.1 percent from its global economic growth forecast for the year, singling out Brexit fallout as the culprit. Curiously, though, the organization sees the U.K. growing faster than both Germany and France this year and next. This disconnect prompted U.K. Independence Party MP Douglas Carswell to label the IMF as “clowns” with “serious credibility problems.”

IMF Sees the U.K. Growing Faster Than Germany and France, Despite Brexit
click to enlarge

Following Draghi’s statement, gold prices immediately popped in Thursday morning trading, effectively hitting the pause button on the correction. On Friday, though, prices continued to slide, contributing to gold’s second straight week of losses.

The next hurdle to be cleared is a U.S. interest rate hike. Expectations that rates will go up in September have wobbled back and forth since Brexit, but in recent days, it’s been reported that Federal Reserve officials feel confident enough to raise them at least once before the end of the year. Gold will face additional pressure if rates are allowed to rise, but if the Fed chooses to stand pat, it could serve as another catalyst for a price surge.

 

New PM May a closet Brexiter? What does it all mean for gold?

Britain’s new Prime Minister, Theresa May, has come into the position post the Brexit vote despite officially supporting the Remain in the EU campaign.  However her statements and actions since her ascendancy to the UK’s top political position suggest she may have been at best lukewarm in her support for the Remain campaign, and perhaps at heart a closet Brexit supporter.  One suspects there may be more to her initial decisions since her ascendancy to the Conservative party’s leadership than just an attempt to unite the party, which only has a slim majority in the UK’s Parliament.

One of her first statements on achieving the party leadership was that ‘Brexit means Brexit’ – an extremely adamant position which she will not be able to back away from, even though the country is hugely divided given the closeness of the vote and a petition signed by over 4 million people to implement a referendum re-run – surely a non-starter.  Because you don’t like the result doesn’t mean you should immediately call for a second vote. Even the Scots didn’t do that after a close independence referendum.

Also her initial Cabinet appointments putting some strong Brexit supporters into key ministerial positions (the charismatic, but highly controversial Boris Johnson as Foreign Secretary and longtime EU sceptic David Davis as Minister for Exiting the EU for example) indicates an additional determination to proceed with the negotiated exit, albeit perhaps not quite as quickly as some EU leaders might appear to prefer.  The exit will not happen until Article 50 is invoked by the UK and current indications are that this might not be until next year – and then there would be a 2-year countdown to the break – so the UK is likely to remain an EU member until 2019 at least.

So what does all this mean for the UK economy – and that of Europe and the rest of the world?  It will certainly be a destabilising influence on the rest of the EU where many member nations have their own anti-EU movements to deal with.  This is why the rhetoric from a number of national leaders is to play hardball over the UK exit, although the economics of so doing would almost certainly be counter-productive for their own economies.  In the event one suspects economics will win out and deals will be quickly renegotiated, particularly as the UK remains either the biggest or second largest market for trade from other EU nations depending on whether this relates to goods or goods and services – but of huge importance regardless.

The big sticking point may well be the free movement of EU nationals in and out of the UK, but there is the possibility that some fudge will be made here of at least partial satisfaction to both sides.

But it is EU instability which will be the most significant factor here.  Polls suggest that many EU nations, and in particular some with the biggest economies, have huge underlying anti-EU sentiment, but whether this would be sufficient to a move to actually exit from the Union is perhaps much more difficult to judge, but it could put the EU project – in particular with regard to ever-closer political union – into jeopardy.  It is this uncertainty which will impact the global economy perhaps for years to come and could well be a stimulus for precious metals as a continued safe haven investment.

Regarding gold, there has been a substantial post-Brexit drop in value over the past few days after a big rise immediately after the vote.  Ironically this has coincided with the publication of bullish forecasts from a number of bank analysts – perhaps these should be seen as a contra-indicator.  After all at the beginning of the year many of these were then preaching a gold price collapse and were hugely wrong then.  They could be equally wrong now.  So much for ‘expert’ predictions!  While the gold price fall has not reached freefall levels yet the trend looks to be downwards – but for how long?

Withdrawals from, or purchases into, the big gold ETFs – for which SPDR Gold Shares (GLD) – is probably the best proxy being the biggest of them all – is a key indicator.  After a big sell-off in the GLD holding on Tuesday, yesterday saw no change, but future day-to-day purchases or sales will likely be very closely followed by the precious metals markets.  Given the big rise in gold and silver prices immediately after the Brexit vote a degree of profit taking is to be expected – particularly in the UK where big gains had been made with the combination of a dollar gold price rise and a sharp fall in the pound sterling’s parity against the dollar.  The pound appears to be stabilising, although could be knocked back a little further if the Bank of England, cuts interest rates by 25 basis points today, as expected, although this could already be factored into current sterling levels against the dollar and the euro.

We would expect the UK economy and indicators to stabilise – or even improve – as the negatives and positives of a UK exit become more apparent.  Certainly the UK stock market seems to suggesting this with the FTSE100 index riding high at around its highest level since August last yearand even the FTSE250 – seen as more representative of the UK economy as a whole, picking up well and now only around 2.5% down on its high point for the year reached immediately pre the Brexit vote when a Remain outcome was seen as something of a certainty.  Indeed it is now up 12% plus since the actual outcome of the vote became apparent.  This does not suggest an economy in crisis as many still-smarting Remain campaigners and EU leaders have been suggesting.  The pound has been the only real indicator to suffer seriously so far and, as noted above this seems to be stabilising and we would not be too surprised if it should recover perhaps half the ground lost, or more, over the next few weeks and months.

But, uncertainty will persist as the post Brexit vote ramifications unwind, and could receive another setback if and when Article 50 is actually invoked.  If Brexit truly does mean Brexit, and this may not have played out fully yet, then the fallout will continue across Europe and in the UK, and all this would seem to be positive for precious metals in the medium to long term.

UK economy could start to pick-up as Brexit fearmongers change tune

Well, some economic indicators – notably the parity of the pound sterling against the U.S. dollar – have tanked since the British public voted to withdraw from the European Union.  Conversely the FTSE 100 larger companies stock market Index has risen quite sharply, as has the FTSE All-Share Index.  The FTSE 250 index, though, which includes the better mid-cap companies, and is perhaps seen as more representative of UK industry as a whole, did fall sharply, is now beginning to recover, but is still around 8% down on the immediate pre-Brexit vote peak when it was widely believed, at least among financial circles, that the Remain vote would win the day.

But just as there are signs that even the FTSE 250 Index may be beginning to pick up there are also signs that the pound sterling may have bottomed.  These movements one way or the other are usually overdone on the immediate aftermath of a momentous decision like that to Brexit.  And, as we pointed out here beforehand in our article: Britain reaping the whirlwind of Remain campaign ‘project fear’ rhetoric sentiment is still suffering from the almost certainly strongly exaggerated statements from much of the political and financial establishment (who were mostly campaigning to remain in the EU) of how much the UK economy was likely to suffer from an exit vote.  Many of these same figures are now needing to attempt to begin talk the economy up again.  While their reversals of stated opinions may somewhat dent their credibility, some of this new found optimism among pre-vote naysayers may well strike home and at least prompt some sort of recovery – probably not to pre-Brexit vote levels but at least part way.  Whether any global benefits of UK ‘independence’ from Europe as promoted by the exit campaigners will come about is a little more difficult to assess, but there is probably truth in at least some of these assessed positive advantage of a break from the EU!

One of the other beneficiaries so far of the Brexit vote has been gold, and in pound sterling terms the gain has been quite spectacular, as we had forecast here ahead of the vote, but has this been overdone on the upside?  Those who invested in gold in the pound sterling pre-Brexit might want to take a look at taking some profits now that markets are likely to settle down.  Not necessarily sell all as we still see some positivity for precious metals ahead, but these investments will have been excellent wealth protectors and it may well be worth banking some of the gains.

There is something of a consensus out there that gold (and silver) may now go through a consolidation period before starting to rise again.  Bank analysts, though, still seem to be falling over themselves to predict higher prices by year end.  But be warned, these are the same people who, at the turn of the year, were predicting often substantial precious metals price weakness ahead – gold at $1,000 or even less – and have since had to change their tune as gold has been on the way up virtually ever since the markets opened after this year’s New Year holiday on January 4th. Bank analysts are nothing but reactive to the latest trends in their ongoing assessments!

Following the investment progress of the main ETFs could be important.  The current consolidation, or perhaps stutter, in the gold price (and its knock-on effect in the other precious metals) has coincided with a small downturn in gold holdings in the world’s largest ETF – SPDR Gold Shares (GLD).  We suspect there has been a bit of profit taking already which may have led to this, but we see the latest price move as consolidation rather than the start of a downturn.  It may take a significant piece of adverse news – a major bank collapse maybe, or a sharp downturn in the major global stock markets – to set the price back on an upwards trend, but in the current shaky financial climate it may not be too long before such an event occurs.  On the other hand should the U.S. Fed again start talking about raising interest rates sooner rather than later, as some are beginning to suggest again, then the gold price could take a knock.  One worries about the Fed talking heads agendas between FOMC meetings as those who talk the idea of interest rate rises up, or down, must be well aware of the likely impact on the markets and the potential for making substantial personal gains on the outcome of their prognostications.  We’re not suggesting that they are, indeed, playing the markets in this manner, but there is certainly the potential for so doing!  It may just be, however, that it is in the Fed’s interest to keep the markets in something of a mood of uncertainty while it deliberates on its next move.

But with Brexit mostly falling out of the equation as the UK and European economies start to stabilise, the next impact may be with the coronation of the UK’s next Prime Minister – either Teresa May (who was pro-remain, but perhaps only lukewarm in that opinion) or the far less well-known Angela Leadsom, who was pro-Brexit.  (Strong women seem to be taking over the world!).  The policies the winner follows may set the agenda for Europe as a whole and may prove to be the next big precious metals driver – for better or for worse.

Stock Markets Erase Brexit Losses: Is the Fallout Already Behind Us? – An American viewpoint

By Clint Siegner*

The UK’s UKIP party leader, Nigel Farage, toiled for 17 years building a movement to lead the United Kingdom out of the European Union. A week ago, he stood in front hundreds of drab bureaucrats in the EU Assembly, most of whom have done little but snicker at his free-market ideals, and declared victory. He told them, quite plausibly, their political union is dying – and good riddance!  – [Editor: He has now resigned leadership of UKIP saying his job is done, but will undoubtedly remain vociferous in his anti-EU views]

UK Independence leader Nigel FarageUK Independence Party leader Nigel Farage

Fans of ‘liberty’ cheered for Farage and for Brexit. And, after the sharp recovery in equity indexes around the world, it looks like stock investors have begun cheering as well. Many say stock market losses sustained in the first couple of trading days were an overreaction. Maybe. Or maybe not.

It is way too early to sound the “all clear” signal, and the real Brexit fallout may still be ahead. The pound sterling is continuing to fall for example.  Here are some other developments that investors should weigh carefully…

Bond markets are not confirming the move higher in stocks. The yield on a U.S. 10-year bond made a new all-time low on Friday at 1.385%. German 10-year Bunds yield -0.12%. That’s right – a negative yield! Bund investors must pay the German government for the “privilege” of lending them funds.

That doesn’t jive with the rally in stocks. There are essentially two groups of people. One is buying stocks aggressively, shouting “Risk On!” The other is loading up on Treasuries and other “low risk” debt as a safe haven. One of these groups is likely to be horribly wrong.

The surge in precious metals prices corroborates the flight to safety we’re seeing in bonds. Bonds and metals may be telling investors something wicked this way comes.

Maybe we’ll see a new bank crisis. All is not well with global banks, and Brexit isn’t helping.

In news that was largely overlooked, EU officials just granted a $150 billion emergency bailout measurefor Italian banks who are drowning in bad debt. Italian officials used the panic around Brexit and fear of a run on their banks to lobby for the special accommodation. Portuguese banks aren’t in much better shape.

Deutsche Bank Collapse

Then there is Germany’s Deutsche Bank (NYSE:DB). Last week the IMF hammered DB in a report labeling the troubled German firm as theriskiest financial institution in the world. DB holds something on the order of $70 trillion dollars in notional value of derivatives exposure. It also carries lots of “non-performing” loans.

And the low-interest-rate regime imposed by European Central bank is suffocating profitability.

Bankers introduced the world to the concept of “systemic risk” when Lehman Brothers collapsed. We discovered banks like to buy and sell derivatives such as Credit Default Swaps, purportedly to hedge risks. Some trader with Bank A buys the diseased bonds of Institution B. Or maybe the trader simply doesn’t like the prospects of B and wouldn’t touch the bonds with a 10-foot pole. Either way he figures B just might default, so A buys insurance in the form of a CDS from Firm C. It works great until B craters and takes C, who has been busily selling a bunch of these swaps to any and all comers, with them.

That’s what happened in 2008. The daisy-chain collapse began with Lehman Brothers and ended when the central bankers and bureaucrats stepped in with your money to make good on the spiraling losses.

There is no telling if Deutsche Bank or some other troubled bank is going to fail and set off a new daisy-chain. We can only say with certainty some smart people seem pretty worried about it. DB shares are trading well below the 2008 crisis lows, and the price of DB credit default swaps have risen dramatically.

EU favorability varies widely in Europe

Much of the Brexit fallout is political and hard for markets to quantify. When Nigel Farage said the European Union is dying, he wasn’t just “Whistling Dixie.” Exit movements all over Europe got a big leg up following the British referendum, but EU favorability has been in decline for some time now. Debt crises and the flood of middle-Eastern refugees have people doubting if an unelected and unaccountable bureaucracy in Brussels will provide the solutions they seek.

Investors should note support for the EU is even lower in France and in Greece than it was in the UK. Spain, Germany, and the Netherlands aren’t far behind. Brexit may well signal the beginning of the end for the EU.

If it turns out Farage is right and the EU dies, markets won’t have much trouble finding the right answer with regard to the value of the euro. It will return to its intrinsic value: zero. In the meantime, we could be in for some wild market action as people on both sides of the political question line up and place their bets.

Greater Chance of Rate Cut Boosts Gold’s Appeal – The Holmes Gold SWOT

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Strengths

  • The best performing precious metal for the week was silver.  Silver trades at a much more volatile spread than gold, thus its over 10-percent price reaction this week, its biggest weekly gain in 15 months (due to the fallout in Europe over Britain voting to leave the EU), is refreshing to see.
  • Market turmoil following the U.K.’s decision to leave the EU is causing more investors to turn to gold and Treasuries, reports Bloomberg. The yellow metal rallied more in the first half of the year than in any other year since 1974, with prices pushed up 24 percent. In addition, traders are now pricing in greater chances of a rate cut than a rate hike in September, pushing Treasury yields lower and boosting the appeal of gold.

 

  • Imports of gold to mainland China from Hong Kong were up 68 percent month-on-month in May, reports S&P Global Platts, totaling 115 mt and reaching the highest level since December. This figure was up 63 percent year-on-year from 70.7 mt in May of 2015.

Weaknesses

  • The worst performing precious metal for the week ironically was gold, still up around 1.99 percent.  Perhaps not too surprising since this was a page-one story.  As central bankers assured the markets that they were ready to act, if needed, equities climbed higher and this became a headwind for further momentum in gold prices.
  • Elvira Nabiullina, chair of the Russian central bank, commented on gold reserves during an interview with a local newspaper this week, according to one Reuters headline. Nabiullina said she sees no possibility of increasing Russia’s gold and FX reserves in the near future.
  • A surge in gold prices could cut Indian demand for the precious metal to the lowest in seven years, reports Bloomberg. “Price is a very important factor for Indians and if it remains at these levels then I don’t see much recovery in demand,” said Bachhraj Bamalwa, a director at the All India Gems & Jewelry Trade Federation. Weak demand since the start of 2016 has forced dealers to sell gold at a discount to clear inventories.

Opportunities

  • Turnover in China’s top exchange-traded fund backed by bullion, the Huaan Yifu Gold ETF, jumped to a record $191 million last Friday following Britain’s vote. Outstanding shares of the fund also jumped five-fold from the start of the year to 1.6 billion, according to David Xu, managing director at Huaan Asset Management. Similarly, a decline of the Chinese real estate market moved billions into the country’s stock market. If Chinese investors sour on stocks and decide gold’s historic value looks tempting, this could mean the next boom for the metal, reports Bloomberg Intelligence analyst Kenneth Hoffman.  Currently the ETF only holds 16 tonnes of metal, but the creators of the fund expect it to grow to 500 tonnes in the next three to five years.
  • According to consensus data from June 28, economists are raising the probability of U.S. interest rate cuts, rather than hikes, over the next 18 months, reports Bloomberg. A hike is seen only from February 2017. Overseas, initial shock following Brexit is easing. Economists are expecting the Bank of England to add more stimulus and Japan’s central bank chief Haruhiko Kuroda said this week that more funds could be injected into markets should they be required, reports Bloomberg.
  • Citing updated commodity forecasts, Credit Suisse analysts Anita Soni and Ralph Profiti believe the price of gold could hit $1,500 an ounce by early 2017. Goldman and Morgan Stanley are among other banks increasing their price outlooks. On Thursday, Australia & New Zealand Banking Group Ltd. reported that it sees bullion rallying to as much as $1,400 an ounce over the next 12 months. If the Brexit vote spurs the world’s central banks to step up easing, currencies will be hurt and gold could be favored even further.

Threats

  • Temp jobs are the first to go in a downturn and serve as a predictor of general job trends, according to a report from BMO Private Bank. And since December, this sector has shed 27,400 jobs, reversing a five-year trend that saw it grow five times faster than overall employment, the bank writes. Compounding the trend, there has been a pickup in initial jobless claims.
  • According to a new poll by Marketplace and Edison Research, 71 percent of Americans believe the U.S. economic system is “rigged in favor of certain groups,” reports CNN Money. On this note, JPMorgan Chase & Co won the dismissal of three private antitrust lawsuits on Wednesday, reports Reuters, accusing the bank of rigging a market for silver futures contracts traded on COMEX. U.S. District Judge Paul Engelmayer said the plaintiffs did not show JPMorgan made “uneconomic” bids, or intended to rig the market at counterparties’ expense, the article continues. Engelmayer’s dismissal was with prejudice, meaning the lawsuits cannot be brought again.  This follows a 2014 court victory by JPMorgan where plaintiffs nationwide accused the bank of trying to drive down the silver price.
  • Gold miner Asanko Gold Inc. has come under attack from a Toronto-based hedge fund, reports the Financial Post, claiming the company’s stock price could plummet 90 percent. K2 Associates Investment Management alleges that Asanko’s gold resources “don’t add up” and appears to be over-inflated by a factor of two. Asanko rejected all allegations by K2.

Britain reaping the whirlwind of Remain campaign ‘project fear’ rhetoric

Post the Brexit vote, the pound sterling is down around 8-9% from the kind of level it was at for most of the couple of weeks before the vote, while there seems to remain a distinct element of pending gloom in much of the economic commentary and the general opinions of the more economically aware in the country’s financial centre.

Should this be so?  The more representative market index – the FTSE 250, which includes many smaller companies not represented in the most quoted FTSE 100 Index of the top 100 London Stock Exchange companies – is actually higher than it was in mid-June (just) but commentators only seem to mention the immediate post-Brexit vote fall of around 13.6% , and ignore the fact that it had peaked ahead of the referendum in anticipation of a Remain vote, and has since recovered a good part of the lost ground.  Year to date the FTSE 250 is down 6% – but is running 6% higher than at its low point in mid-February – hardly a stock market meltdown as many had been predicting.  Indeed if one looks at the larger companies which comprise the FTSE 100 index this is actually 3% HIGHER than its mini peak on June 23rd when Remain appeared the most likely referendum result.  This certainly doesn’t seem to represent a particularly downbeat outlook by the market professionals.

Gold of course has risen in the dollar, and obviously rather more so in the pound, which is a positive for those who took our advice and bought some gold, or gold derivatives, ahead of the referendum as insurance against a possible Brexit vote.  Again we had not ruled out a result for the vote to leave the EU ahead of the referendum vote contrary to the opinions of most of the media, politicians and economists.  We had recognised the big underswell of anti-EU feeling in the country which did not seem to be being picked up by the opinion polls.

But even the performance of those elements which have come back quite sharply like the pound could probably be at least partly blamed on the tenor of the Remain campaign which was preaching huge negativity should the vote be to leave.  Some would say Remain campaigners are thus being proved correct, but could this just be that they had imbued such a negative opinion in the minds of the sector of the populace which voted to Remain in the EU that we are now reaping the consequences of such a ‘project fear’ campaign?

Interestingly though some of the European stock markets have fared far worse than the UK ones.  Germany’s DAX Index for example is down 5.6% on the year, the French CAC down 6.4%.  Spanish and Italian indexes fell even more.  One wonders where the Brexit vote is impacting most – it doesn’t seem to be the UK?

It is notable that there is already a degree of backtracking on the likely adverse effects of the Brexit vote by the politicians of all hues who are now desperately trying to see positives in the result however much they may, at heart, disbelieve them.  There should, for example, be much comfort in that the financial markets actually on balance seem to be positive rather than negative.  This could suggest that the pound may be oversold too, although it is showing little sign of recovery so far and is still slipping back against the dollar and the euro.  In this context it should be noted that Britain imports a far greater value of goods from EU nations – Germany in particular – than it exports to them, and while much was made by the Remain campaign of the possibility of UK exports to the EU being cut off in the case of a parting of the ways, the imposition of trade barriers would seem likely to have a greater impact on the EU than on Britain itself.  One suspects that self-interest will predominate here and reciprocal trading relations will be largely uninterrupted even if official trade deals may be slow in being negotiated.

The lower value of the pound could also boost consequentially less-costly UK exports globally, although would make imports more expensive.  It could also work against that other threat of multinational organisations moving manufacturing plants out of the UK as the resultant lower cost of goods by remaining might more than balance the possibility of the imposition of tariff barriers inside the EU – if indeed this were to occur.

While the prospect of Brexit would not be ‘a storm in a teacup’ as some optimists and Leave campaigners might suggest, it may well not be nearly as disastrous for the UK economy as the Remain camp was saying only 10 days ago.  But the belief in their rhetoric is in itself having an adverse effect on sentiment and may continue to do so for some weeks and months.  This will likely settle down as politicians change their tune on the fait accompli of the Brexit vote with more positive statements certain to flow from those who only a week or so ago were preaching doom and gloom.  While the UK economy may be in for a difficult several months it may not be nearly so badly affected once things are seen in the cool light of day as the anti-Brexit commentary inevitably dies down.

Gold: Last man standing post Brexit vote

A perhaps controversial U.S. viewpoint  from Guy Christopher* on the fallout post-Brexit, who discusses calls for a similar break from the EU by a number of countries.  Gold (and silver) have been the major beneficiaries as markets dived and currencies collapsed against the dollar and the yen.  We have since seen something of a turn back towards the status quo, but geopolitics and geo-economics remain shell-shocked. Secession fever is even apparent in the U.S., although in our opinion this is a total non-starter – but, who knows…..

 

“Look at that screen,” exclaimed Fox Business Network’s Stuart Varney, referring to the television graphic showing markets crashing across the globe. “The only thing going up is the price of gold!”

“It’s always a dangerous thing when you leave democracy up to the people,” joked Varney’s guest – venture capitalist and author Peter Kiernan, as they watched Britain vote Thursday night to escape the European Union.

The dust is still settling after Britain’s seismic Brexit vote June 23rd. At issue: who should control British economic and immigration policies – Brits themselves, or unelected bankers and their bureaucracy stooges. A choice between the liberty of self-determination or the tyranny of faraway cronyism.

While the gritty election fallout spread through rattled markets and wafted into plush offices of banking’s money masters, the hard and fast implications were clear. The British Empire stood tall on what outspoken political leader Nigel Farage called Our Independence Day.

“Only Lunatics Would Consider EU Membership”

The Brit’s dramatic decision is the latest revolt of those fearing the loss of personal and national identities. Until Brexit, the populist revolution against powerful centralized world order was a series of smoldering brush fires.

The Brexit victory has now kindled a wildfire.

Tattered EU Flag

Spanish Catalonia was all set for independence from Spain in 2014, until stopped in its tracks by Spanish courts. Scotland the same year managed to muster 45% of three million votes in a losing bid to leave the UK. Quebec voted down independence from Canada in 1995, but has never stopped talking about it.

Strong political voices in Italy, France, Austria, and even Germany are shouting to preserve national identities or else to leave the EU. Italy’s Five Star separatists claim support of half that country, and have just elected Rome’s mayor.

Political leaders in the Netherlands and Poland, just hours after the June 23rd British Revolution, made it clear they will push for a Brexit replay. Scots lost no time in restating their intention to separate from Great Britain.

Switzerland decided just two weeks ago to drop all plans to join the EU. “Only lunatics,” said one Swiss official, “would consider EU membership.”

The big loser so far in the fight for economic self-determination is Greece. Up to their Parthenon in debt for the next hundred years, Greeks elected Alexis Tsipras as Prime Minister, who promised to stiff Greece’s banking creditors and give Greece a new start.

But Tsipras turned on his people, repudiated the cradle of democracy’s historic vote, and left Greece even deeper in debt. Tspiras was channeling an old political axiom – if voting mattered, we wouldn’t let them do it.

Secede

Here at home, the current and former governors of the always revolution-ready Texas have suggested secession from the United States. A move to include secession as a plank in the Texas Republican platform came up just two votes short last May. Secession efforts are now called “Texit.”

THE MAIN EVENT

Some thirty states have circulated petitions recently to gauge interest in secession. Californians have discussed carving their Golden State into three states.

Which brings us to the main event in the United States. In twenty weeks, Americans will set a course for the world with their own historic choice – either sticking with what America has right now, or demanding monumental changes to government authority over lifestyles and pocketbooks.

The long list of financial crimes by over-bloated centralized governments include trillions in money printing to enrich banks; destructive interest rates to smother savings; punishing taxes; the war on cash to demolish private wealth; suffocating regulations on business owners; and the ongoing crime-in-progress of theft through planned inflation.

Unpopular open border policies toward immigration cannot be overemphasized as a driving factor in Britain’s vote, or in the coming U.S. presidential election.

You wouldn’t know it from watching or reading most lapdog media, but nowhere was the reaction to the Brexit earthquake more stunning than the immediate rush to gold.

Media Overlooked the OTHER Big Story Last Week…

In a matter of a few hours Thursday night, gold shot straight up almost one hundred bucks from low to high, stopping just shy of $1360 per ounce. The price perfectly tracked media reports of voting results.

As markets cratered worldwide, the message was clear. Gold was the only safe haven – the blue ribbon champ – the last man standing.

By dawn’s early light, London dealers were reporting record sales of coins and bars to store-front customers standing in line. Google searches for “buy gold” went soaring 500%. Online sellers had heavy traffic.

Brexit's Effects on GoldGold rose 22% overnight in the British pound, 7% in U.S. dollars.

Brexit has been all about wealth and liberty – who will have it, and who will protect it. Gold buyers knew the most enduring wealth for 5,000 years has been gold and silver you hold in your hand, unlike the trillions in digital wealth evaporating into cyberspace during Brexit’s aftermath.

Wealth is the stored and stockpiled accounting of our labor, time, energy, and talent. We depend on that store of wealth to ensure financial liberty for our families, to pass on to future generations, or just to enjoy a day at the beach without punching a clock. And without being told what to think.

Throughout history, gold and silver have been the sole survivors found in the smoking ruins of failed kingdoms, borders, flags, and currencies.

As markets began sinking like stones June 23rd, as bankers panicked, and as media pundits blathered, the price of liberty was paid, and the value of gold embraced.

Both gold, and liberty, were destined to shine that night, no matter what the cost.

Damage done – gold and silver pause but poised

The Tsunamis haven’t struck, but are on the way. The damage has been done! Gold and silver pause ahead of strong moves!   

Gold TodayGold closed in New York at $1,326.50 up from $1,318.90 on Monday a rise of $7.60.  In Asia the gold price began to pull back and continued in London, dropping to $1,308 before reversing higher.  

  • The $: € recovered to $1.1092 from $1.1004 before starting to weaken again before New York opened.
  • The dollar index moved lower to 95.97 from 96.37.
  • The Yen recovered slightly [102.31 down from 101.70].
  • The Yuan was stabilizing to 6.645 from 6.65 yesterday.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  06  28

2016  06  27

SHAU

SHAU

282.65

283.36

282.15

283.43

Dollar equivalent @ $1: 6.6446

$1: 6.6412

$1,323.11

$1,325.41

$1,320.75

$1,327.42

The Yuan ‘fixing’ continues to lower the Yuan against all currencies, as you can see above. The Yuan is headed lower and will continue to do so, retreating from levels it was taken to by a rising dollar. After the current pause as the full weight of the ‘Brexit” earthquake is fully assessed by global markets we expect aftershocks to strike in the financial world.

It is important for gold investors to realize that gold is simply reflecting the real weakness of all currencies, from now on. As a result of the tectonic shifts in the monetary world that have been triggered by the U.K. leaving the E.U., we have seen the first change, of many to come, in the global economy.

LBMA price setting:  $1,312.00 down from Monday 27th June’s $1,324.60.

The gold price in the euro was set at €1,200.92 down €0.040 from Monday’s €1,200.96.

Ahead of New York’s opening, the gold price was trading at $1,310.70 and in the euro at €1,183.05.  

Silver Today –The silver price closed in New York on Monday at $17.75 up from Friday’s $17.72 a rise of 3 cents. Ahead of New York’s opening the silver price stood at $17.63.   

Price Drivers

We live in a time of consequences that will bring gold into an active role in the global monetary system!

  • The economic growth in China has been at the expense of the developed world. In 2000 80% of global cash flow went to the developed world. By 2020 only 34 % will go to the emerging world. At the moment the developed world gets around 55% of the global cash flow. This is the foundation of the economic decay of the developed world.
  • The credit crisis in 2008 was a separate event of euphoric attitudes towards credit. Whether in auto finance or at government level the same view of credit persists and encouraged.
  • The developed world is experiencing severe deflationary pressures, which are ameliorated to the point where they are barely visible due to various forms of quantitative easing. The result appears to be nearly zero inflation.  We are waiting to see inflation burst upon us.  There is a point where deflation and inflation stop compensating each other and combine to trigger rocketing inflation. The classic case of this was in Germany in 1923 in the Weimar Republic. The root cause first showed itself in 2008 from which the world has not yet emerged.
  • Political institutions have either been emasculated due to ‘hung’ governments or lack of will to really promote growth. Crises initiate the process of loss of control by governments triggering further socio/political crises. Brexit appears to be a start in a long series of events which will breed further crises. [More in our newsletters – subscribe below]

We look to Europe for the next crisis. It is likely to spawn protectionism and potential capital controls as the world moves into reverse gear in the process of globalization.

Gold ETFs – On Monday the holdings of the SPDR gold ETF (GLD) again jumped 13.068 tonnes to a holding of 947.381 tonnes and the holdings of the Gold Trust (IAU) rose 0.45 of a tonne to take the holdings to 202.36 tonnes.

Since January 4th this year, the holdings of these two gold ETFs have risen 352.955 tonnes.

Silver –Silver prices are still ready to go full pelt, after this short-term consolidation.

Julian D.W. Phillips

A Classic Case of Failed Socialism: What’s Next After the Brexit?

By Frank Holmes, CEO and Chief Investment Officer for US Global Investors

Brexit Vote

Defying sentiment polls leading up to last week’s historic Brexit referendum, British voters said “thanks, but no thanks” to excessive EU taxation and regulation, choosing to take back Britain’s sovereignty in financing, budgeting, immigration policy and other areas essential to a nation’s self-identity. It was a momentous victory for the “leave” camp, led by former London mayor Boris Johnson and U.K. Independence Party leader Nigel Farage, who invoked the 1990s sci-fi action film “Independence Day” by declaring June 23 “our independence day” from foreign rule.

As I’ve been saying the last couple of weeks, British citizens and businesses have grown fed up with an avalanche of failed socialist rules and regulations from Brussels, responsible for bringing growth and innovation to a grinding halt. Even if the referendum had gone the other way, it should still have served as a wake-up call to the European Union’s unelected bureaucratic dictators. Euroscepticism and populist movements are gathering momentum in EU countries from Italy to France to Sweden, and the week before last, fiercely independent Switzerland, which voted against joining the EU in the 1990s, finally yanked its membership application for good.

American voters should be paying attention. Many have already pointed out the parallels between the Brexit movement and Donald Trump’s populist campaign for president. This connection was not lost on Trump, who tweeted early Friday morning: “They took their country back, just like we will take America back.”

Britain’s decision to leave exposes the fragility of trade right now and mounting apprehension toward globalization. The EU is mired in tepid growth, and the blame cannot be pinned on immigrants, as some have tried to do. Instead, Brussels’ policies are anti-growth. Moore’s Law says the number of transistors in a microchip doubles every two years. That’s just a fact. American entrepreneurs embrace and indeed push the limits of technological innovation, but “Eurocrats,” to a large extent, seem to be in open opposition to it. This is why many large, successful American tech firms such as Facebook and Google are treated with such hostility in Europe. The bureaucrats are so against growth and prosperity, it wouldn’t surprise me if they tried to do away with Moore’s Law.

A Legendary Day for Gold

Immediately after results were announced, the British pound sterling, one of the world’s reserve currencies, collapsed spectacularly against the dollar, plunging to levels not seen since Margaret Thatcher’s administration. The euro, the world’s only fiat currency without a country, fell more than 2 percent.

Gold, meanwhile, screamed past $1,300 an ounce to hit a two-year high, proving again that the yellow metal is sound money and fervently sought by investors worldwide as a safe haven during times of economic and political uncertainty.

Gold and British Pound Make Huge Moves Following Brexit Referendum
click to enlarge

Uncertainty is indeed the order of the day. As the World Gold Council (WGC) put it on Friday, “It is difficult to find an event to compare this to.” Trading blocs have fractured before, but none as large and significant as the EU. As the world’s fourth most liquid currency, gold saw massive trading volumes. At the Shanghai Gold Exchange, an all-time record amount of gold was traded following the Brexit—the equivalent of 143 tonnes in all.

“We expect to see strong and sustained inflows into the gold market, driven by the intense market uncertainty that now faces the global markets,” the WGC wrote.

The Brexit lifted not just bullion but gold stocks as well, with many of them climbing to fresh highs. Shares of Barrick Gold shot up 10 percent in early-morning trading while Yamana Gold and Newmont Mining both saw gains of over 8 percent.

I’ve always advocated a 10 percent weighting in gold—5 percent in physical gold, 5 percent in gold stocks—with rebalancing done on a quarterly basis. Gold is now up at least one standard deviation for the 60-day period, meaning now might be a good time to take some profits and rebalance. It’s been a spectacular six months!

So What Happens Now?

As I said, global growth is unstable, especially in the EU, and the Brexit will only add to the instability. This will likely continue to be the case in the short and intermediate terms as markets digest the implications of the U.K.’s historic exit.

It should be noted that the country will remain a member of the EU for two more years, during which time the nature of the relationship following the official divorce can be negotiated. These negotiations will take place without David Cameron, who unexpectedly announced early Friday morning that he was stepping down as prime minister.

The results of the referendum also call into question the unity of the kingdom itself. England and Wales both voted to leave the European bloc while Scotland and Northern Ireland were aligned in their desire to remain members.

UPDATE: Pound, markets and gold – let’s get Brexit into perspective

 Edited and updated article first posted on info.sharpspixley.com on Friday, post the UK’s Brexit referendum vote.  A minor update  taking into account opening  of markets following the weekend.

Yes, Brexit has been bad for UK markets, but No it has not been nearly as bad so far as many had feared. It’s generally been far worse for global ones!  But it’s early days yet…..

Immediately prior to the referendum vote market indicators had been riding very high in anticipation of a Remain victory.  The pound had spiked to over $1.50 against the US dollar – its highest level for around 7 months and the post-Brexit vote headlines have all tended to look to the British currency’s fall against that level – currently around 8%.  But compared with just over 2 weeks ago it is only down less than 5%.  Bad, but not quite so horrendous, and so far way short of the kind of fall predicted by some very high profile investors and analysts.  The knee jerk reaction though, once the Leave vote had become a virtual certainty, was for the pound to spike down to around $1.324, thus a peak to trough move of around 12% – in actuality a move from a spike up to a spike down – but that is what media headlines will have led with.  The reality is a somewhat less calamitous fall once the smoke had started to die down, although still an extremely significant one,  although we expect to see continuing pressure on the pound as some of the ramifications of the popular vote come home.  Indeed the pound has continued to fall this morning as I write coming down a further 2%.

And of the major currency markets the media mostly refer to, the pound was indeed by far the worst performer.  But in contrast, let’s take the most followed UK stock market index – the FTSE 100.  From media headlines who would realise that the FTSE 100 level  at Friday’s close at around 6,139 is actually 3% HIGHER than it was only just over a week ago when it fell below the 6,000 mark, is up, albeit by a small amount, on the year to date and fully 10% higher than it was at this year’s low point to date in mid-February.  This was certainly no immediate UK stock market crash as some would appear to have us believe.  Some might reckon this is just a mild correction, although again we would anticipate further downwards pressure this week.  But the FTSE 100 does have a degree of protection as there are several resource companies in the Index including precious metals miners and precious metals are one of the market sectors benefiting from the vote.  Some of the broader-based FTSE Indexes will fare a little worse, but so far again, not a calamitous meltdown.  The FTSE100 has continued to drift downwards on Monday morning but so far is still holding above the 6,000 level.

On the other side of the coin let’s take the gold price.   ‘Gold price soars’ the media headlines will tell us, but it actually fell back from a knee-jerk peak of $1,360 as it became apparent that Brexit was likely to carry the day, down to below levels it had already previously reached as recently as in mid-June, coming back down nearly $50 or so once the markets had time to digest the reality.  Sure it had spiked up over $100 from around the $1,250+ level it had fallen to when the world had anticipated the Remain vote would prevail, but for significant periods in the previous month it had been much higher peaking at around the same level that we saw at the weekend’s close only a couple of weeks earlier.  Gold has strengthened more this morning and we would not be surprised to see this trend continuing, particularly if gold ETF inflows remain strong – a massive 18.4 tonnes were added to the SPDR god ETF (GLD) on Friday for example.

With gold rising in US dollars and the pound falling against the US dollar, those in the UK who invested in gold ahead of the vote – as we suggested was a n0-brainer from a waeltah insurance angle in a previous article: Britain Facing Brexit Bombshell.  What Would Happen to Gold? have done very nicely indeed thank you, with the play gaining around 20% so far, depending on where you take the gold price level from.  But at any pre-Brexit gold price the decision to put some pounds into gold will have been a very positive one.  We cautioned all along that whatever the opinion polls were saying there was a huge underlying groundswell of anti-UK feeling and this fully expressed itself in the turnout and the eventual result.

Initial global stock market reactions to the UK decision have mostly been as bad, or worse, than in the UK itself.  For example Japan’s Nikkei was down 4%,but has recovered some of this fall in Monday trading. The Dow fell by over 3%, Germany’s DAX by 7%, the French CAC Index down 8% with the major Italian and Spanish Indexes down around 12%.  European markets were still continuing to suffer this morning, the major indexes showing further falls.  So the real Stock Market carnage so far has not been in the UK (where the FTSE 100 was actually up over the week), but in Global markets – particularly in Europe.  One wonders now whether the Brexit decision is the trigger which will prompt a global fall in stock prices which could match, or even exceed the 2008 market crash as some well-thought of economists have been predicting.  Is the House of Cards going to collapse?

The rest of  Monday is already turning out to be a very interesting day in the markets indeed.  Will we see further carnage in global Indexes during the day as the ramifications are digested?  Will the UK Indexes plunge as the fall in the pound sterling parity against the dollar might suggest?  Or will we see something of a recovery across the board, albeit perhaps a temporary one?  Markets tend to over-react to bad, or good, news so it’s a definite possibility.

We suspect global stock markets face an unsettled few days, weeks, or months.  Precious metals may continue to gain as safe haven buying accelerates.  As noted above we saw an absolutely massive 18.4 tonnes of gold going into the GLD SPDR gold ETF on Friday.  Will we see more big rises in the week ahead, or are profits going to start to be taken?  GLD is a good proxy for precious metals investment interest and although there may remain something of a concerted effort by the bullion banks to stabilise the gold price, the flows into the ETFs will be further pressuring already tight supplies of available attributable physical gold and one scenario is that the gold price could burst upwards rather than downwards.  OK – ‘burst’ is something of an oxymoron but perhaps an apt representation of possibilities.

Look out for volatile markets, we don’t think they will settle down again for some time to come as politicians blow hot and cold over the impact and timetable of the Brexit on the UK, European and global economies.  It could presage a very rough time ahead on global markets.

 

 

Brexit fallout: Gold, Silver Soar, Pound and Euro Plunge, Yen soars   

Gold TodayGold closed in New York at $1,257.50 down $8.70 on Thursday ahead of the start of voting in Britain.  This morning Asia took it up to $1,310 as they were the first market to ‘see’ the Brexit. At the opening on London the gold price the gold price pulled back to $1,319.

The $: € plunged lower to $1.1069 from Thursday’s $1.1336. The dollar index moved higher to 95.77 up from 93.48. It is a day when the dollar is stronger overall but weaker in the Yen. The Euro and Yuan were much weaker, alongside sterling.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  06  24

2016  06  23

SHAU

SHAU

270.42

267.96

278.92

268.66

Dollar equivalent @ $1: 6.6236

$1: 6.5797

$1,269.85

$1,266.70

$1,309.77

$1,270.01

With the Yuan tumbling against the dollar, the gold price in Shanghai was much stronger and led the way for London’s pricing.

While investors can’t export physical gold, they can take a position in Shanghai ahead of London, take their profits and export those. In this way they can ‘arbitrage’, matching their ‘long’ positions in London at higher prices, should they wish.  Above shows that they could have taken a position in Shanghai, well ahead of London’s opening in physical then match the position in London selling out the Shanghai position in Shanghai afterward, before the close. Then it would have shifted the funds to London and not the gold. This makes the International side of the Shanghai Stock Exchange an integral part of the global gold market.

The positive Technical picture promises higher prices.  

LBMA price setting:  $1,313.85 up from Thursday 23rd June’s $1,265.75.

The gold price in the euro was set at €1,186.96 up €76.75 from Thursday’s €1,110.21.

Ahead of New York’s opening, the gold price was trading at $1,323.35 and in the euro at €1,195.92.  

Silver Today –The silver price closed in New York on Thursday at $17.33 up from Wednesday’s $17.27 a rise of 6 cents. Ahead of New York’s opening the silver price stood at $17.93.

Price Drivers

The unexpected happened ! The paw paw hit the fan! The drama erupted at 7.00 a.m. London time and began to be discounted in Shanghai before London opened.

We have just witnessed an earthquake of over 8 on the global, monetary Richter scale.

Will we see a Frexit [Marie le Pen has just called for a French referendum and Spain may follow as could the Netherland…….], a Spexit, a Nexit……? This could prove a mortal blow to the E.U. and eventually leave just the strong members remaining, implying, very long term, a much stronger euro.

The biggest hit was taken by the banking sector as shares in leading banks dropped 20 to 30% at the opening. We are reassured that the banking sector can survive these crises, by Mark Carney, Governor of the Bank of England who pointed out that the banks in the U.K. have raised over 100 billion pounds in capital, while the Bank of England stands ready to provide additional liquidity of another 250 billion pounds in support.

We wondered why they did not resort to the imposition of the dollar premium, as they did in a similar crisis in 1971. Then we realized that the provision of so much more liquidity did more.

  • It permitted a tumbling of sterling [improving the U.K.’s international competitiveness [while joining the currency war].
  • It set the U.K. on a Quantitative Easing path of major proportions.
  • It abandons concern for the exchange rate and stability of Sterling’s value in currency markets facilitating a weaker exchange rate. This suggests a steadily falling pound sterling in the weeks/months ahead.

We recognize that this is why the Fed waited before considering a rate hike. We don’t expect one until the end of 2016 at the earliest, if then. More to the point, we are aware that the Fed/Treasury will not be happy with a strengthening dollar and may well act to counter it, just as we expect the Bank of Japan to intervene in the foreign exchange markets to lower the exchange rate of the Yen.

Please note that gold has only, so far recovered to where it was a month ago at its recent peak. The changes wrought by Brexit promises to take gold higher long term.

Gold ETFs – On Thursday the holdings of the SPDR & gold Trust remained the same as did those of the Gold Trust at 915.898 tonnes and at 201.91 tonnes respectively. We expect that to change today!  

Since January 4th this year, the holdings of these two gold ETFs have risen 321.022 tonnes.

Silver –Silver prices are going to sprint ahead of gold prices now that the way forward higher is now clear.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

 

Brexit vote Day – All quiet on the ‘Western Front’ for now

Gold TodayGold closed in New York at $1,266.20 up $0.30 on Wednesday ahead of the start of voting in Britain.  Asia took it up to $1,270 and London let it slip a dollar and a half, despite strong demand for physical gold in the U.S.

The $: € moved lower to $1.1336 from Wednesday’s $1.1271. The dollar index moved to 93.48 down from 93.89. It is a day when the dollar is weaker in the world’s main currencies, but the Yuan was weaker too.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  06  23

2016  06  22

SHAU

SHAU

267.96

269.81

268.66

268.00

Dollar equivalent @ $1: 6.5797

$1: 6.5886

$1,266.70

$1,273.72

$1,270.01

$1,265.17

While the Yuan weakened against the dollar, the gold price in Shanghai was slightly stronger than New York, which led the way for London to follow. This showed clearly the small change in direction was due to the influence of Shanghai showing a measure of pricing power.

Gold prices worldwide are ‘on hold’ pending tomorrow’s result in Britain, after which we will see strong movements.

We believe that a ‘stay in’ vote has been discounted in global financial markets, to some extent.

At the moment, the positive Technical picture remains unchanged. We don’t expect any change, subject to tomorrow’s vote.

LBMA price setting:  $1,265.75 up from Wednesday 22nd June’s $1,265.00.

The gold price in the euro was set at €1,110.21 down from Wednesday’s €1,119.96.

Ahead of New York’s opening, the gold price was trading at $1,261.25 and in the euro at €1,110.60.  

Silver Today –The silver price closed in New York on Wednesday at $17.27 from Tuesday’s $17.23 a rise of 4 cents. Ahead of New York’s opening the silver price stood at $17.31.

Price Drivers

We have to be careful to not see the referendum in the U.K. as the ‘be all and end all’ in the global economy today. There are many other issues going on in other parts of the world.

The dollar is a weaker today, a factor totally unrelated to the British referendum. The news out of the E.U. from France is that manufacturing continues to fall into a contractionary state.

Repeat: The Pound Sterling continues at very strong levels! If the vote is to leave, expect a heavily plunging pound!

Currencies and precious metals are in gambler’s territory as the polls look pretty even!

Gold ETFs – The holdings of the SPDR Gold ETF (GLD) rose another 3.564 tonnes as the physical buying continued at a fast pace, leaving its holdings at 915.898 tonnes. The Gold Trust (IAU) saw no action yesterday and its holdings remain at 201.91 tonnes.  

Since January 4th this year, the holdings of these two gold ETFs alone have risen 321.022 tonnes. Silver –Silver prices are stronger over yesterday’s price at $17.41 but remain and now wait for the vote to be announced tomorrow morning.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance