Right now, global markets are dancing to the Brexit beat. Traders plow money into equities and sell gold every time a poll leans toward the UK staying in the EU. Fifteen minutes later they are reversing because a poll says it’s a tossup. We feel if you are invested in Gold you shouldn’t care. If you are trading Gold you should.
BREXIT IS COMING TO GET YOU
First: let’s quickly look at the logic behind the market’s gyrations on Brexit perception.
The UK Leaves
- GBP Gets Slammed- Sterling devalues quickly from what can best be called “separation anxiety”
- Stocks are Sold- in a riskoff frenzy
- Gold Rallies- as a hedge against uncertainty.
Easy enough. Supranationals are hard-selling the Brits that their economy, possibly their very existence depends on staying! But what the EU is also worried about is a domino effect. If the UK votes to leave, a precedent is set. Already French President elect Marine Le Pen has promised a referendum on staying in the “decaying EU”. Nationalism is on the rise for several reasons and European politics are leaning right. The result could be a dissolved EU.
The UK Remains
- GBP stabilizes
- Stocks are Bought
- Gold is Sold
Pretty self-explanatory. But if you are a long-term investor in Gold (aka money) you shouldn’t care.
Here’s why:
REMAIN > NO GBP > 1 LESS CURRENCY
If the UK remains the GBP will still devalue, but at a pace the Supranationals deem fit. Further, we feel a vote to stay will generate momentum to eliminate the GBP in favor of the EURO. That is the goal of the EU, and it makes sense given their agenda. With a shrinking number of currencies to balance FX portfolios Gold will benefit. Not tomorrow, not next month, but when the Gov’ts of the world run out of ideas to keep their own assets levitating on easy money; that’s when Gold benefits. And it won’t be small.
LEAVE > DOMINO EFFECT > EURO CRISIS
This one is easier. A Brexit forces the issue to a head earlier. Moving on.
UK: Stay or Go?
We don’t pretend to know the referendum outcome. But we think the British Central Bank has limited choices regardless of the decision by the people. If the UK leaves they should buy gold to stem their own currency slide. If they remain, the GBP should convert to the EURO and be done with it. As the saying goes: Sh-t or get off the pot.
So you should care about the Brexit vote. If the Brits vote to leave Gold will benefit now. If they vote to stay it must benefit later. Remaining will generate a Gold selloff as hot money pukes positions. But volatility isn’t risk if you aren’t leveraged.
-Soren K.
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