Award-Winning Metals Market Report: June 2016 - Week 4 Edition

Mike Fuljenz
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Posted: Jun 22, 2016 12:01 AM
Award-Winning Metals Market Report: June 2016 - Week 4 Edition

How will This Week’s “Brexit” Vote Impact Gold?

There has been a major change of sentiment in Britain since the killing of MP Jo Cox last Thursday. A deranged man shot and stabbed her to death, shouting “Britain First.” He killed Cox because she favored remaining in the European Union (EU). The political rhetoric in Britain has been vitriolic, angry and confrontational, but this act shocked Britain to its senses. Over the weekend, the polls trended toward remaining in the EU, so this Thursday’s vote will likely be to remain. But even if the vote calls for Exit, the poll is not the final word. Parliament would still have to vote to confirm any future exit from the EU.

Before the Fed’s meeting on June 15 and the Jo Cox murder on June 16, money managers were loading up on gold, raising their net-long positions in gold futures and options by 29% in the week that ended Tuesday, June 14, according to U.S. Commodity Futures Trading Commission data released last Friday.

In the first 5-1/2 months of 2016, the SPDR Gold Shares ETF attracted $10.3 billion in new money, the most of any of the more than 6,000 ETPs tracked by Bloomberg. The Comex peak price was $1,318.90 last Thursday, the highest since August of 2014. A Bloomberg survey of 22 gold traders and analysts said in a poll last week that gold could reach $1,350 by June 30, but only if Britain voted to leave the EU.

Through last Thursday, gold was rising due to the instability that would be caused by a British exit from the EU. Such an exit would likely lead to the collapse of the British Pound, and then the Euro, as more and more nations decided to vote to leave the European Union, throwing that continent into chaos. But the reversal of sentiment in England over the weekend sent gold back down (so far) on Monday morning.

If the Brits surprise the world and vote for Brexit on Thursday, gold would likely rally sharply, but it won’t fall far if the Brexit vote fails, since that outcome is already reflected in gold’s decline to $1280.

What the Big Banks and Hedge Funds are Saying (and Doing) about Gold

Last week, several sources were predicting $1,400 gold after the June 23 Brexit vote. Ole Hansen, head of commodity strategy at Denmark’s Saxo Bank, said “a vote to leave the European Union would almost ensure a prolonged period of uncertainty where stocks could suffer” creating “an increased risk that gold could be propelled towards $1,400, the 2014 high.” The reason, he says, is the “contagion” effect if Britain leaves the union. “The potential leave vote does not only raise questions about the impact on the UK but also the contagion risk to the rest of Europe. Other countries, if given the chance, would likely also be showing skepticism towards the European Union.” If the Brexit vote fails, he said, “we see the downside risk [for gold] limited to around $1,250/oz.” Even if Britain stays in the EU, gold still compares favorably with the $8 trillion in sovereign bond debt in Europe and Japan offering negative income rates.

The London-based international banking empire HSBC (originally standing for Hongkong & Shanghai Bank Corp) agrees that gold could rise 10% fairly quickly if Britain leaves the EU, but there is little downside for gold if the vote fails. HSBC’s chief precious metals analyst James Steel thinks gold reach $1,400 with a Brexit vote, vs. a fall to no lower than $1,220 if Britain votes to Remain.Gold might go higher than $1,400, Steel said, over “broader concerns about the future direction of the EU after the vote.”

As a reminder, the billionaire fund manager Ray Dalio said recently “If you don’t own gold, you know neither history nor economics.” Another noted hedge fund manager Stanley Druckenmiller, whose fund returned 30% a year over 25 years, also recently advised investors to sell stocks and buy gold. George Soros also returned to gold earlier this year in his Soros Fund Management. In addition, Wall Street’s current “bond king,” Jeff Gundlach, who runs DoubleLine Capital, also invested in gold earlier this year, predicting a rise to $1,400, citing negative bond yields in Europe and Japan and low rates in the U.S.

The outcome of this week’s Brexit vote is important, but it will not be the last word on the fate of the EU.

Gold Waits for Thursday’s Vote

Gold reached $1315 last Thursday morning before slipping to $1299 at the end of last week. On the London pm fixes, gold rose from $1283.30 on Wednesday to $1310.75 on Thursday and $1290.70 on Friday. Thursday’s close was the first London close above $1300 in 22 months, since August 14, 2014. Gold’s initial rise late Wednesday came from the Federal Reserve’s vote of “no action” on interest rates. Then, gold spiked up early Thursday after the shocking assassination of a member of British Parliament, Jo Cox, over her pro-EU stance. This dramatizes Britain’s sense of fear about the “Brexit” vote this week. After her murder, the “Brexit” sentiment reversed, causing the stock market to rally and gold to correct.