Global financial markets have appeared to be playing a game of economic Jenga for the past several years, and Friday’s Brexit vote removed a major block. The move created a worldwide gasp in those markets, with many wondering if the stack would fall now or in the near future. Amidst the turmoil those who buy gold and invest in the yellow metal were both celebrating a two-year market high 1 and trying to guess at the long-term implications of this shock to the system.
Brexit Comes as a Surprise, Boosts Gold
The majority of pundits and analysts were caught by surprise, having foreseen a narrow victory for the “Stay” crowd. However, there is now more awareness that the issue for citizens of the UK goes far beyond the mere economics of EU membership or going it alone.
The immediate impact of news was to produce a 4.7 percent increase over the previous day’s gold price, with the spot hitting $1,358.20 per ounce. 2 This move gives more support to the bullish reports coming from many respected analysts, with many estimates landing in the $1,400 range for the year.
However, the declines in other commodities may be an even bigger indicator of the long-term impact of this transformative vote. A large basket of commodities saw sharp drops, and two immediate reasons are provided for this bearish reaction:
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- First, the U.S. dollar continues to show new strength against all other fiat money.
- Secondly, concerns over further global industrial malaise and lower production levels for oil, copper, iron and other such basic commodities auger lower demand and prices.
Nationalism, Failing Economies and Precious Metals
Another element of the story behind the vote itself is the cultural movement occurring in other Western nations, from France and Germany to the U.S. In fact, Donald Trump actually jetted to Scotland to use it as a backdrop to highlight the nationalist fervor that many see behind his rise to political prominence. 3
According to Trump, “People want to take their country back. They want to have independence, in a sense. And you see it in Europe, all over Europe.” The underlying significance to this movement to economists is the potential impact on the policies and paper currencies of countries around the world.
To long-term investors in gold and daily traders alike, the Brexit vote is a vindication of the perceived fragility of economies built around the failing policies of most central banks. All realistic observers understand that running currency printing presses 24/7 without any attempt to control runaway spending and rapidly accumulating debt is simply not sustainable. Regardless of any political posturing that all is okay, the cracks are becoming major fractures.
While the world media and pundits of all stripes are speaking breathlessly with endless conjecturing about the ongoing implications of this referendum on government bureaucracy and spending, others are taking action now. Increasing numbers of gold buyers understand clearly that there are more players ready to pull some more blocks from that Jenga stack. These gold traders and investors are moving en masse to ensure their portfolios offer the protection found only in gold and other precious metals when the teetering turns into a full-scale collapse.
A Note on the Fed
Also, the Brexit development clearly impacts another significant component of the gold market prognostications. Many analysts were already dismissing any potential aggressive action by the FOMC in the next quarter. 4 Now, it is a virtual certainty that the Fed will not be bold enough to try any more rate hikes for this year.
Moreover, the constant effort by Chairman Yellen to jawbone the market with discussions of more increases is now essentially a toothless threat. With a virtually empty tool box, will we soon see the dreaded negative interest rate raise its head? If so, it’s possible even the $1,400 targets are far too low.
2 – http://www.cnbc.com/2016/06/23/gold-up-1-on-uk-referendum-nerves-after-leave-has-early-lead.html
3 – http://www.npr.org/2016/06/25/483400958/from-brexit-to-trump-nationalist-movements-gain-momentum-around-world
4 – http://fortune.com/2016/06/24/brexit-federal-reserve/