Take The Golden Exit Post Brexit

| About: SPDR Gold (GLD)

Summary

In our recent report on the gold bubble, we outlined our expectations for gold if the U.K. voted for or against leaving the European Union.

Though we did not expect a Brexit vote, gold seems to be playing out as we discussed.

We said initial financial market disturbance should drive capital into gold.

However, we continue to expect capital to migrate to risky assets in the U.S. for better returns as fear subsides, and the dollar should remain a pressure against gold.

Thus, I suggest investors in gold relative securities take their profits now, or the golden exit post Brexit.

In my report Gold Bubble - Part I (on Brexit), I laid out how gold should play out in both Brexit and a Bremain scenarios. Now that the U.K. citizenry has determined Britain should leave the European Union (NYSEARCA:EU), I think it is important we review the outlook for gold post Brexit. Gold Bubble Part II will be delayed until later this week as a result of the current relevance of this update, but it will still be published because I continue to see a gold bubble.

First let's review what I stated about the Brexit scenario in Gold Bubble Part I:

Much of gold's recent gains have come on the uncertainty around the U.K. referendum. While I agree that a U.K. vote to leave the European Union would be immediately disruptive to global financial markets, its lasting economic impact to the U.S. economy is not worrisome. In fact, turbulence and division in Europe would likely drive capital meaningfully into U.S. securities and treasuries, and importantly drive the dollar sharply higher. After perhaps an initial pop in gold on the unlikely event of Brexit, gold should therefore give up the soft ground it has been built up upon… Many are banking on uncertainty and chaos causing a stock market shakeup for America along with Europe, but I'm doubtful of the severity and duration of any such blow… Strong relative dollar gains versus the British pound and the euro would price down gold in dollar terms. The passage of time would alleviate fear, and usher capital back to risky assets and out of gold… such an action (Brexit) would likely lift gold a bit higher even despite dollar appreciation, before investors migrated back to risky assets in the U.S. for better return and to European assets on valuation. That would eventually weigh against gold and deflate the bubble as well.

Precious Metal Securities

06-24-16

SPDR S&P 500 (NYSE: SPY)

-3.6%

iShares Europe (NYSE: IEV)

-11%

iShares MSCI United Kingdom (NYSE: EWU)

-12%

SPDR Gold Trust (NYSE: GLD)

+4.9%

iShares Gold Trust (NYSE: IAU)

+4.9%

iShares Silver Trust (NYSE: SLV)

+2.4%

Direxion Daily Gold Miners Bull 3X (NYSE: NUGT)

+18%

Direxion Daily Gold Miners Bearish 3X (NYSE: DUST)

-18%

Market Vectors Gold Miners (NYSE: GDX)

+5.9%

Market Vectors Junior Gold Miners (NYSE: GDXJ)

+5.0%

Goldcorp (NYSE: GG)

+4.4%

Newmont Mining (NYSE: NEM)

+5.1%

Randgold Resources (NASDAQ: GOLD)

+6.1%

Barrick Resources (NYSE: ABX)

+5.8%

Yamana Gold (NYSE: AUY)

+5.2%

Gold Fields Ltd. (NYSE: GFI)

+9.4%

Silver Wheaton (NYSE: SLW)

+2.2%

Coeur Mining (NYSE: CDE)

+5.0%

Brexit played out for gold as we expected it to Friday, though we did not expect Brexit to actually unfold in the first place. The immediate reaction was abrupt global financial market disruption, but as we suggested, the severity of the blow was not sharp for U.S. markets. If I continue to be right on the reaction, then the duration should not be either. In that case, gold should come under pressure as the initial fear subsides and capital seeks better returns in riskier U.S. securities.

Gold and the dollar appreciated together as we suggested they would initially. The dollar should continue to gain against the British pound and the euro over the next couple days as economists and strategists fuel the fire with research on the impact of Brexit. However, heavy and undue speculation about the Fed calling it quits for this year may act as a drag against dollar appreciation. Don't expect that to last very long though, as I anticipate June's employment report will be significantly stronger than we saw for May. Data of that sort will reignite speculation about Fed action, especially if it gains support of Fed commentary. Thus, I suggest investors enjoying the pop in gold relative securities on Friday should take profits here. In other words, take the golden exit post Brexit, because I expect it will close soon. As for physical gold, I'll remind followers that I am a believer in it for long-term wealth protection and portfolio diversification. You'll want to follow this business column to receive my next report on the Gold Bubble and my regular coverage of various asset classes including gold.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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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