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.

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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.

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.

 

 

Gold’s 2015 performance beating most stock indexes

Gold’s 2015 performance far better than generally believed

Click on above link to read a new article on Sharpspixley.com.  It points out that, contrary to the impression given by most mainstream media headlines Gold has actually performed better than most stock markets so far this year – including the Dow, FTSE 100, TSX and ASX in some cases substantially so with gold rising in local currencies while the domestic stock markets have fallen.