The Gold Lift-Off

The price of gold is on the launch pad…and it may be poised for a moonshot.

We already saw the price of gold ‘lift-off’ after the Brexit announcement. In the early hours of voting, gold rose from US$1,251 an ounce to peak at US$1,376 per ounce. Since then it has fallen back to today’s price of US$1,328 an ounce.

Gold’s run is not over.

Most investors think of precious metals as ‘commodities’, but not us. We view them as forms of money that compete with central banking-printed money for the preference of asset allocators. Whatever affects confidence in central banking money also affects the price of precious metals. And right now confidence in central banking-created money is being shaken to the core.

Both the polls and the markets had the Brexit vote wrong. Two days prior to the vote, the ‘Remain’ camp seemed on course to triumph. While the polls were close, market participants were heavily biased in favour of a Remain vote.

Global monetary elites, media, policymakers and bankers were united almost completely in favour of Britain remaining in the EU.

Bank CEOs had informed staff that there would be thousands of layoffs in London should the Leave campaign prevail. Will they follow through with this now that the Leave campaign has won?

Since London is the financial centre of the world, such threats are bound to skew the opinions of market makers somewhat.

In the lead up to the vote, sentiment produced some fascinating market action. Gold rose sharply from 1 June to 17 June, based partly on polling data that suggested Leave would win — and also on Fed dovishness, which has not changed.

Then there was a sudden, sharp reversal on 20 June based on polls showing Remain had taken a lead. Reuters was running headlines saying, ‘Gold slips as expectations grow Britain will remain in the EU’.

The problem was that the polls showing Remain was ahead were thin gruel. The lead for Remain was only two points, and the margin of error was more than three points.

This makes it a statistical tie; one still too close to call.

Had there been a victory for Remain, it would have been business as usual. This outcome was priced into the markets. But…

The Leave outcome was never fully priced into markets.

As you’ve seen in the past month, this Leave ‘victory’ has been a market earthquake. It is this Leave victory that is the catalyst for much higher gold prices.

Hedge funds have spent over half a million dollars to commission private exit polls that allow them to know the results ahead of the rest of us. It is worth noting that hedge funds were able to act on this information early. They had access to the data prior to the close of the vote.

This is a form of insider trading by the hedge funds, but it’s perfectly legal because they’re using their own information from the polls instead of stealing the information from someone else. It’s the stealing part that lands you in jail.

In the immediate aftermath of the Leave vote, we witnessed a huge collapse in stock prices, sterling, and the euro. They have all bounced back. For now.

It came as no surprise to me to see gold spike higher. Gold may have ticked down if Remain won, but because the Remain win was already priced into the markets, it would not have suffered too much.

Importantly, there’s a lot more to gold price action than just Brexit.

The biggest driver of gold prices lately has been Federal Reserve policy and the strength of the US dollar.

Gold rallied from February to early May as the Shanghai Accord played out. Then it partially retraced those gains in mid-to-late May as the Federal Reserve regional bank presidents — Bullard, Mester, and George — went on a carefully orchestrated campaign of hinting at rate increases in June. This was just to test the waters. And it was yet another form of manipulation of investor expectations.

By late May, more powerful voices, such as Lael Brainard and Janet Yellen, made it clear that the Fed would not raise rates in June. This caused gold to rally back, breaking through the US$1,300 per ounce level briefly.

Then, on 17 and 21 June, polls were released showing that Remain was ahead. This caused gold to decline again. Here’s a chart of this recent price action:


Source: Bloomberg

[Click to enlarge]

This chart is important. It shows you how the Remain vote was priced into the markets. On the other hand, the chart below demonstrates how gold shot higher as the Brexit votes were counted.

Gold price per ounce in US dollars — 30-day chart


Source: Bloomberg

[Click to enlarge]

Note that this is a smoothed out spot gold price chart. It does not show the price spike during the Brexit vote count.

The long term fundamentals still favour gold.

We have already seen the start of the gold price rally.

Gold will be a good bet for a long time to come.

All the best,

Jim Rickard,
Strategist, Strategic Intelligence

Publisher’s note: You’ll find plenty of contrastive views about gold among Port Phillip Publishing’s editors. We don’t have a ‘company line’, so we trust our readers to read each argument and decide for themselves. But whether you’re bullish or bearish on the gold price, you can’t argue with results. And Greg Canavan’s results with gold stocks have already been impressive this year. But he argues that the biggest gains are still to come. That’s why he recently released a special new report about the critical moment for gold stocks and the once in a lifetime gains that could be on offer. You can read more here.

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James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Fat Tail Investment Research. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

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