The Brexit Bet – Heads, Gold Wins! Tails, Gold Wins!James Cordelaine
In any given historical period, gold’s price, volume of purchases, and frequency of buy-sell activity have given us strong indications of our global monetary and economic strength. If the global economy were a medical patient it’s fair to say gold would be its pulse.
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As a cogent article in Investopedia points out, “Although gold is no longer used as a currency in developed nations, it continues to have a strong impact on the value of those currencies.” In the Byzantine Empire, gold was used to prop up the value of fiat currencies. And until President Nixon pulled the plug in 1971, the United States was solidly on a gold standard.
Fast-forward to the 21st century: Although Wall Street now frequently attempts to assign gold a negligible role, it’s increasingly difficult to tune in to the financial news and not encounter a story about how the shiny metal serves as a barometer of the global economy. A June 22 article and video on CNBC’s Trading Nation, depicting how gold’s fortunes might fare as a result of today’s Brexit referendum, offers a strong illustration.
No doubt about it – a decision to abandon the European Union would entail formidable economic repercussions for the UK. While Dennis Davitt, portfolio manager at Harvest Volatility Management, is ordinarily a seller, not a buyer, of gold, he’s now taking a different tack. His unfortunately conventional reasoning up to this point had been that since gold, unlike dollars, has never yielded interest, it’s had little to offer an investor.
But Davitt now favors gold because of its risk-averse potential, should the referendum win, whereupon chaos could suddenly seize the UK by its vulnerable pound sterling. Also, with the possibility of negative interest rates looming over investors’ bank accounts, odds are gold will offer a far better return than the dollar in months to come.
But suppose the Brexit referendum winds up in favor of the “remain” camp. How will that shake out for gold?
Appearing on the same Trading Nation video presentation with Dennis Davitt, Rich Ross, head of technical analysis at Evercore ISI, comes at the question from a chartist’s angle. True, gold’s turned in the best performance of all asset classes in 2016. But its twenty percent jump in price took place in the first six weeks of the year.
Since that time, gold has regularly oscillated between twelve hundred and thirteen hundred dollars per ounce. Just above that top formation, if gold breaks beyond thirteen hundred twelve on an EU “leave,” it can hook into a renewed mojo and be off and running. On the other hand, as Ross weighs the options, “if peace prevails on the ‘Bremain,’ the dollar eases, [it will provide] a bid into gold, commodities and high yield….”
According to all indications then, heads – gold wins, tails – gold wins!
It’s not often you get odds like that. That said, once the true economic fallout from either a Yay or Nay vote becomes apparent, gold’s creep towards $1,300 and beyond may well become a sprint. If you’re waiting for the confirming economic indicator in the form of a higher gold price, be careful what you wish for. Meanwhile, gold’s win could also spell chaos in stock markets worldwide. Better grab cover while you can.