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Gold Was Rising Long Before Brexit

Financial markets are in turmoil (and will likely be for weeks and even months) following the Brexit vote. It’s amazing that markets were so unprepared for the outcome, given the closeness of the polling right the way through the campaign. Whilst the result might be a shock to some, it was hardly a surprise.

In some respects it reminds me of the scare campaign and hullabaloo that surrounded ‘the Y2K bug’ (remember that?). Lots of hysteria about the potential ramifications, but in the end the world kept turning, the sun rose again the next morning and all passed without any lasting consequences....a storm in a teacup ultimately....

Now I’m not intending to be flippant here, but my personal view is that media scribes often react hysterically to things that they actually know very little about.

The biggest issue with the Brexit vote is the level of uncertainty, but does it really justify the sorts of extraordinary panic that we’ve seen on financial markets? Furthermore, how likely are we to see a robust recovery over the coming weeks as the dust settles?

I don’t know the answer to these questions, but I think there’s a reasonable prospect of stability returning once participants have taken a deep collective breath and thought about things a little more carefully and calmly.

Not surprisingly, gold has been the biggest beneficiary. It’s smashed its way higher to its best level since the GFC. Which is great news for gold bugs and particularly investors in Aussie gold stocks, as they’ve enjoyed the double-whammy of a sharply higher US$ gold price, compounded by a weaker A$ - leading to an A$ gold price that’s close to an all-time high.

Thank Heavens for Debt-Addicted Central Bankers

Gold’s best friends at the present time are the world’s debt-addicted central bankers. Like a bunch of stimulant-addicted athletes looking for their next high, the world’s central bankers have become hugely dependent on stimulus.

What started out as a means post the GFC to avoid international economic catastrophe, has now morphed into a dangerous addiction – and the means of keeping the day-to-day economic wheels turning. 

Keeping rates low for several quarters is very different from keeping them there for years, which in turn has punished savers and distorted market prices, encouraged enormous and destabilizing financial speculation. Central bank policies of inducing negative real rates to ‘incentivize’ borrowing has expanded the money supply and devalued currencies – in turn forcing investors to chase riskier assets in order to generate returns.

Little wonder that many mums-and-dads investors, along with the Chinese, Indians and Russians, are increasingly seeking refuge in gold!

Gold is a Currency (a reliable one!)

These days, no currency around the world is as stable as gold. As we’ve recently discussed, a weak employment report cast doubt on the Fed’s intention to hike interest rates in June, but the Brexit vote and the Orlando terrorist attack has surely ended any remaining prospect of a rate increase.

A look at gold in all of the major currencies of the world since late 2015 but just prior to Brexit, reveals both the strength in gold and the corresponding weakness in fiat money. Prior to the Brexit vote, gold was up almost 24% in dollar terms, 19% in euro terms, 6.5% in yen terms, 29% in pounds sterling-terms, 20% in Australian dollar terms, 19% in Canadian dollar terms and 20% in Swiss Franc terms.

The fact that gold has outperformed all of the major currencies of the world points to a significant development, gold is the strongest currency in the world because other foreign exchange instruments are under siege.

While most judge the strength or weakness of currencies as their exchange rates against one another, it is their trend against gold that exposes true weakness across all currency instruments.

When the Fed announced that it would leave interest rate policy unchanged, they also lowered projected rate hikes for 2016 and 2017, whilst even raising the possibility of lowering rates back to zero if events warrant such an action.

This is further encouraging news for gold, as gold has a dual role as a commodity and currency. Gold has been around a lot longer than any of the world’s currencies. Gold is money and in today's environment, it offers a yield that is competitive with all of the major currencies of the world.

Moreover, while central banks can print paper currencies to their hearts’ delight using monetary policy tools, they cannot print more gold!

One of the persistent arguments against owning gold by many financial advisers and brokers is that it “does nothing” and that it incurs storage costs. Unlike cash, which earns interest, gold is a non-yielding asset.

However, in today’s world of zero percent interest rate and negative interest rate policies in a growing number of countries internationally, the old rationale that favours holding cash over gold is increasingly defunct.

Base rates in the industrialised nations have been near zero since the financial crisis of 2008. Frequently throughout this period the rate of inflation has been higher than this, implying a loss in spending power over time for each unit or currency.

This factor, coupled with the many risks which were left unresolved (or have been exacerbated) in the wake of the last financial crisis, provides a strong incentive to hold gold.

We have therefore upwardly revised our likely price target range for gold during 2016 to between $1200 and $1500. 

View More Articles By Gavin Wendt

After a decade as a broking resources analyst with Intersuisse, Gavin helped establish the Fat Prophets Mining Report during 2005, writing and producing the report until he established MineLife during late 2010. He writes about mining and energy companies via his MineLife reports.

Disclaimer: Gavin Wendt, who is a director of Mine Life Pty Ltd ACN 140 028 799, compiled this document. It does not constitute investment advice. In preparing this report, no account was taken of the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this report, investors and prospective investors need to consider, with or without the assistance of a securities adviser, whether the information is appropriate in light of the particular investment needs, objectives and financial circumstances of the investor or the prospective investor. Although the information contained in this publication has been obtained from sources considered and believed to be both reliable and accurate, no responsibility is accepted for any opinion expressed or for any error or omission in that information.



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