Reflections in a Golden Yukon
Being away for two weeks in the Yukon, where communications range from good in Whitehorse and Dawson to spotty to non-existent everywhere else, allows one to get a different view on things going on in the world. It is a region where the rest of the world doesn’t seem to exist, or even matter. But the Yukon is a paradise for those wanting to get away from it all. Beautiful scenery is the backdrop for the territory’s two major industries—mining and tourism. The Yukon saw the world’s last great gold rush, the famous Klondike gold rush from 1896 to 1899. Today thousands of tourists trek to the Yukon annually to visit the Klondike gold fields and Dawson City. We reflect on the events of the past two weeks.
The US Job Numbers
The US job numbers came in sharply below expectations on June 3, 2016. Nevertheless, the pundits spun the numbers as a one-off and concentrated on the drop in the official headline unemployment rate (U3) that fell to 4.7% from 5%. Of course they ignored the drop in the labour force participation rate and the large drop-off in the actual number of unemployed, who were just dropped from the labour force altogether. It is a masterful demonstration of “statistical flummery.” But “statistical flummery” has been going on for years, and if one calculated the unemployment rate as it used to be back in the 1980s, it could be as high as 23% as reported by ShadowStats www.shadowstats.com, and not the miracle 4.7% officially reported by the BLS.
The FOMC Meeting
The credibility of the FOMC, and its chair Janet Yellen, is on the line. The FOMC left interest rates unchanged, despite the Fed hinting in May that the interest rate hike was back on the table. Yellen did an incredible dance of double talk to justify the decision to move from rate hikes, to no rate hikes, back to rate hikes, then back to no rate hikes once again. At the end of the day all they are left with is seven years of 0% interest rates, trillions of dollars of quantitative easing (QE), an economy showing signs of rolling over once again, and a global economy with significant risks, not least of which is the Brexit. The decision to leave interest rates unchanged may have been the right one, but the ongoing flip-flopping is killing their credibility.
The Orlando Shootings
The Orlando shootings may have been a tragic event, but it must be put into context against the claims that it was the deadliest mass killing in US history. It is not by a long shot, and we reflect on the long history of mass killings in the US, going back to its founding. But the main concern might be the potential economic fallout. Orlando is at the centre of Florida’s tourist industry. Hints that Orlando’s Disney World might also have been a target make many uneasy.
The Assassination of British MP Jo Cox
The fate of the entire EU hangs on the Brexit referendum that takes place on June 23, 2016. We are writing before that event, even as our release will occur after the event. The assassination of Jo Cox was tragic, but the cynic might look at it and note that polls that were supporting the Brexit seemed to shift to supporting “stay” after the killing. Markets have been gyrating, with gold up and the British pound down, only to see them reverse sharply following the assassination and indications that the Brexit will fail. Irrespective, demand for physical bullion has been strong. Adding to the cynicism is the recent Austrian election that has been described as “irregular,” with possible voter fraud after the left-wing party narrowly defeated the far-right anti-EU party that was leading in the polls up until the election. There have been some other mysterious incidents over the years that helped sway votes. Simply put, the Brexit is too important to lose. The fate of the EU hangs in the balance. The careers of too many people are in jeopardy if the Brexit succeeds. It has to lose. A Brexit win would ensure market chaos follows.
Weekly Market Review
Stocks
The stock markets continue to hang in even as they have gone nowhere now for a year. During this time the stock markets have had two sharp corrections but none exceeded 20%, the usual definition of a bear market. Some are suggesting that the markets are making a triple top. Maybe, but only a major breakdown under the February 2016 low at 1,810 for the S&P 500 might suggest that. Given the rarity of triple tops the technical formation might even be just a launch pad to new highs, especially if the Brexit fails as expected. But signs abound that at least another drop is about to get underway. The third quarter is not normally friendly for stocks, and August and September are the two worst months. But July is relatively benign and the markets could still continue to hang in. We also take a look at the best-performing market this year, the TSX Venture Exchange (CDNX). The CDNX has had a spectacular roller coaster ride with soaring gains followed by devastating crashes. Signs abound that new major advance is underway.
Currencies
The US$ Index and the euro continue a confusing dance that has been going on for months now. Neither seems to make any headway either up or down. Arguments can be made for the two of them to go either way – in opposite directions of course. The Brexit vote is most likely the next phase for both of them. Recent volatility is expected to continue. But overlooked in the currency wars is the fact that the best-performing currency in 2016 is gold. Gold is a currency by virtue of its reserve status with central banks. Further, gold is by far the best-performing currency since 2000. The others aren’t even close.
Gold and Precious Metals
Gold investors have no doubt been feeling a bit whiplashed over the past week. But it is important to maintain some perspective. The volatility is just Brexit noise. Once the vote is over gold could have a sharp move either way, depending on the outcome. The latest report on the commercial COT suggests that the move should be to the downside, which would fit with the expectation that the Brexit will lose. Despite the volatility for gold, the same can’t be said for silver or the gold stocks. While both have followed gold up and down, it has not been with the same vigour. That is a positive sign that suggests to us that, once the Brexit noise is over and the positive seasonals kick in later in July/August, gold should resume its recent upward trend. Strong physical demand is being seen leading up to the Brexit vote, and it is causing some illiquidity in the market.