A Brexit Could Send The Gold Price Beyond $1,400
Summary
- According to a recent poll, the leave campaign has edged ahead with the vote just over two weeks away.
- Economists predicted that gold could rise to as high as $2,000 if the Grexit had occurred, we feel similar could be likely in the event of a Brexit.
- With US rate hikes looking unlikely in June or July we feel nothing can stop gold’s ascent.
- Additionally, the British pound could have ~20% downside on an exit.
We are unabashedly bullish on gold. But we feel there is good reason to be right now. For the last few weeks economists across the world had been penciling in a US rate rise at the FOMC meeting in June or July. This was because the minutes from the Federal Reserve's April meeting revealed that if key indicators on inflation and employment stayed on a positive track, a rate hike would be "appropriate". Such was the market's belief that rates would rise, the price of gold dropped down from approximately US$1,300 to US$1,200 per troy ounce in just a few short weeks.
But all that has changed thanks to a shocking read on non-farm payrolls for May. We were expecting a deflated number due to the Verizon (VZ) strike, but we certainly were not expecting a figure of 38,000. Like the market, we had been expecting the US to add 162,000 new jobs to the economy in May, so this was a huge miss and one which really does cast doubts on whether the Fed could even consider a rate hike in the near-term. Perhaps those that said rate rises wouldn't happen until 2017 are on the money here.
By all but ruling out a rate rise in June, this leaves gold in a great position to head up to $1,400 in our opinion. The reason? The Brexit. The vote is just over two weeks away and the latest figures reveal that the vote for leaving has edged ahead by three percentage points. A lot can change between then and now, but if it stays the same way we think that the week leading up to the Brexit vote could be awfully volatile for financial markets across the world. This could lead many to seek safe havens, and what better safe haven to jump into than gold?
The Brexit is looking more and more likely as the date draws closer. It had been largely dismissed up until recently, but concerns over immigration appear to be swaying voters. The bad news for the remain camp is that Boris Johnson is about to up the rhetoric ahead of the vote. He has been selling the leave vote very well, stating:
"The impact of EU-enforced uncontrolled immigration to the UK - made worse by the euro crisis - has been to depress the wages of the low-paid, while fat cat FTSE-100 chiefs have seen their pay packets soar to 150 times the average pay of their workforce. It is time that liberals everywhere saw the EU for what it is: essentially a stitch-up between the very biggest corporations, their lobbyists and the commission to frame regulation in such a way as to keep out the competition, especially from start-ups and innovators."
A compelling argument which has been working well, judging by the latest polls. Over the next week or two things may become clearer, but right now we are expecting a Brexit to actually occur. As unlikely as it seemed a couple of weeks ago.
We are sure many remember how volatile markets became during the Grexit talks, and we have reason to believe this could be just as bad, and perhaps even worse. One key fear that many economists have is that the Brexit could be the start of a mass exodus from the European Union by other member nations. The ramifications of this are incredibly hard to predict, but we feel that is part of the reason why gold will become attractive. In our opinion, investors don't like the unknown, so are likely to invest in something they know will hold up in times of volatility.
When Greece was voting to leave the European Union, some economists stated that the price of gold could climb to$2,000 an ounce if it left. Arguably a British exit from the EU would be of greater significance than that of a Greek exit, which would imply that similar or even greater gains could lay ahead for investors. We don't like to get carried away with stating that gains of the magnitude are probable, but we do feel $1,400 per ounce is achievable.
Source: DailyFX
For this reason, we have continued to top up our position in the SPDR Gold Trust ETF (NYSEARCA:GLD) when market sell-offs allowed us to. For the ETF, we expect it to reach $139 if things play out as we expect. That equates to a return of almost 17% from the current trade price. Quite a reward for a safe haven.
We also expect substantial downside for the British pound (FXB) should the Brexit occur. Some experts have said the worst case scenario would see the pound drop to 1.15 against the dollar. Which would be a 20% drop from where it sits right now.
Source: Finviz
Right now, our preference is taking gold long with the Brexit as the key catalyst. The only thing we feel can bring it down from where it is would be a rate hike by the Fed. But we don't believe there will be one in June and probably not in July. So in our opinion, this gives the gold price ample time to make a run for $1,400 and beyond.
This article was written by
Analyst’s Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (16)
Sunday July 5th was the vote and on
Monday gold traded between 1163&1175
Closing at 1170.
http://seekingalpha.co...If gold backed total global debt 100 percent, it would be valued at $33,900 per ounce because
the total amount of gold exhumed in the history of the world is approximately 183,600 tonnes, or 5.9 billion ounces. If we take that figure and multiply it by the closing price on June 16, $1,181 per ounce, we find that the value of all gold comes within a nugget's throw of $7 trillion.
This is an unfathomably large amount, to be sure, yet it pales in comparison to total global debt. The world now sits beneath a mountain of debt worth an astonishing $200 trillion. That's greater than twice the global GDP, which is currently $75 trillion.
If gold backed total global debt 100 percent, it would be valued at $33,900 per ounce. So Gold’s price, upon which the settlement of these debts ultimately relies is vastly understated compared to the debt that held against a fiat currency that contains no gold or any other real money. Including derivatives that would increase the price per ounce by another 6 times that amount because the global derivatives market is another $1.2 quadrillion, almost 90% is owned by the U.S. This figure is greater than the entire world’s G D P, 20 times the G D P to be exact, and should not be taken lightly. Why? Simply because of the fact that it is highly unregulated. It is so unregulated that the Congress has declared it illegal to regulate it.
http://seekingalpha.co...Most of exhumed gold isn't ever traded. It is a safeguard against loss through inflation. Most of the naked gold shorts issued are never transacted and just expire on expiration date. This manipulation does enable the price to continue to be fixed.
If Brexit then euro FALLS dollar up but gold up some......probly to 1307.
so either way the local high is challenged only.
