Will This Become the Worst Financial Crisis of the Postwar Era?

Mike Fuljenz
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Posted: Jun 29, 2016 12:01 AM
Will This Become the Worst Financial Crisis of the Postwar Era?

This is the worst period I recall since I've been in public service. There's nothing like it, including the crisis [of] October 19th, 1987, when the Dow went down by a record amount 23 percent. That, I thought, was the bottom of all potential problems. This has a corrosive effect that will not go away.

– Former Federal Reserve Chairman Alan Greenspan, speaking on CNBC, June 25

Looking terrified, the Former Federal Reserve Chairman Alan Greenspan came on American TV Friday morning and said the UK vote “is just the tip of the iceberg.” He said European political integration is “failing.” He added that “Brexit is not the end of the set of problems, which I always thought were going to start with the euro because the euro is a very serious problem in that the southern part of the Eurozone is being funded by the northern part and the European Central Bank.” The influential British magazine, The Economist added on Friday: “Uncertainty abounds. Expect a global chilling effect on investment.”

The UK itself is also at risk of being ripped asunder. Consider the fact that Scotland held a referendum last year to leave the United Kingdom (UK). It was barely defeated. Last Thursday, Scotland voted overwhelmingly to stay in the EU, by a decisive 62% in favor of staying. What if Scotland held another referendum fairly soon, voting to remain in the EU by leaving the UK? The Scottish people have made their preferences clear. There is nothing stopping Scotland from holding another vote to leave the UK.

The First Minister of Scotland, Nicola Sturgeon, said after the Brexit vote: “As things stand, Scotland faces the prospect of being taken out of the EU against her will. I regard that as democratically unacceptable,” adding that “I think an independence referendum is now highly likely.”

The next hurdle facing Europe is the anti-EU sentiment brewing in other major EU nations. According to The Economist, the sentiment for “Brexit” was about 50-50 in Britain, but it is far more one-sided in France, where 61% hold an unfavorable view of the EU vs. only 38% favoring membership. In Greece, the totals are even more overwhelming, with 71% against the EU and only 27% favoring the EU. The “exit” polls are close to 50-50 (pro and con) in Germany (48-50), Holland (46-41) and Spain (49-47).

Gold demand will be especially high in Britain and throughout Europe as the British pound and euro lose value, pushing gold higher in those currencies. Gold coin demand was very heavy in Britain on Friday. One dealer said “We've already got queues forming,” with British Sovereigns being in highest demand.

The CEO of Sharps Pixley said the company sold out of gold Britannia coins and kilo bars. He said “We've been forced to get emergency stocks from our German and Swiss offices.” The bullish case for gold is making a lot of sense in Europe right now and American gold buyers are now “along for the ride.”

In our company, sales of gold coins and certified low-premium antique gold coins are up in 2016, which I believe foreshadows a very good next couple of years for the rare coin market. In this current crisis, I look at gold bullion and certified antique gold coins as insurance for the rest of your portfolio.

President Obama may have helped to swing the Brexit vote toward leaving the EU when he visited Great Britain in April and threatened that the British would have to go to “the back of the queue” for any trade deals with the U.S. if they voted to leave the EU on June 23. For starters, there is no current “trade deal” queue or any specific deal under consideration with Britain now. Trade deals between politicians are not necessary for businesses in one nation to trade with another. Beyond that, President Obama alienated the British people by presuming to tell them how to vote.

Gold Soared Over $100 in Six Hours

Gold soared over $100 in six hours late Thursday night when Britain’s expected 52% to 48% vote to Remain in the European Union (EU) suddenly turned into 52-48 to Leave the EU. The British pound lost 10% in the same few hours. At 6:00 pm Eastern time Thursday, when some pundits were calling the vote for “Remain,” gold was trading at $1252. By midnight, gold touched a peak of $1362.60 in the futures market for a $110 gain, which quickly corrected to a $1315 close on Friday and $1325 on Monday. On Friday, the Dow opened down 500 points and lost 610 points by day’s end. With just a few days left in the first half of 2016 gold is outperforming stocks by about 27% and silver is beating stocks by over 30%.

Brexit – and its Sequels – Should Keep Driving Gold Up

Although gold rose rapidly in dollar terms last Thursday night, it virtually soared in terms of the weak British pound, which at one point fell from $1.50 to $1.35 (-10%). That means gold rose from about 835 British pounds ($1252 divided by $1.50) per ounce to 1000 pounds ($1350 divided by $1.35), up 20%.

The British pound is the oldest continuously-traded currency in the world, dating back to 760 AD. The term “pound sterling” came to mean one pound (12 Troy ounces) of silver, currently worth about $213. Therefore, the world’s oldest continuous currency has lost over 99% of its value in terms of silver. In a similar fashion, the U.S. dollar has lost 98.5% of its value in gold since 1933, when gold was $20.67.

The reason gold soared last Thursday night is that gold is primarily a hedge against the long-term erosion of paper currency values. The euro also lost about 2.35% to the U.S. dollar overnight. Compared to its paper rivals, the dollar is considered the world’s “safe haven” currency, so investors are pouring into U.S. dollar assets. Even so, gold is still rising strongly in dollar terms, while rising faster in other currencies.

If Britain successfully secedes from the European Union (EU), some other EU nations will want to follow Britain’s lead. So far, a strong majority of Greek and French people favor leaving the EU. If France ever left the EU, that artificial governmental body based in Brussels would likely have to gradually disband.

Right now, there are 40,000 bureaucrats in Brussels making micro-laws for euro-businesses to follow. That is the main reason the British rebelled against the EU – they don’t want to work for foreign lawyers.

We can’t forecast exactly what will happen next, but the decline in global stock markets could be a sign of future hard times in stock and bond markets. The benchmark Euro-stock index fell 8% Friday. Several European stock markets were hit even harder – Greece was down over 13%, while Spain and Italy were each down over 12%. Even the Japanese market was down nearly 8%. By comparison, the U.S. stock market decline was relatively mild. The Dow was only down 3.4% and the S&P 500 fell 3.6% on Friday.

Friday’s events also put an end to any discussion of a Federal Reserve rate increase this year. In fact, the Fed funds futures market is now giving greater odds to a Fed rate CUT than any increase this year. Last week, before the Brexit vote, Fed Chair Janet Yellen said that a vote for Brexit could “negatively affect financial conditions and the U.S. economic outlook.” Now, with the idea of a Fed funds rate increase off the table for the foreseeable future, the gold price will not be whipsawed by every new Fed statement.