Brexit: Get out the pitchforks
Brexit is the only story of the week. More has been written on Brexit than almost anything else since June 23, 2016. Markets have roiled, taking a worse beating than they did following the Lehman Brothers bankruptcy that triggered the panic of 2008. Currencies have tanked. The US$ has soared. And so did gold.
Pundits said that Brexit wouldn’t win. It did, throwing conventional wisdom out on its ear. But will Brexit actually ever happen? Political, financial and economic uncertainty is sure to dominate going forward.
The British people were mad at the EU. The EU had become a monster that needed to be slain. Populist politicians, who seem to come to the forefront especially during periods of economic stress, led the ‘leave’ campaign. The mob got out their pitchforks and wanted to burn the monster (the EU) at the stake. Political parties split.
The prime minister resigned, but not until October, and he will leave it up to his successor to trigger Article 50 in order to really start the Brexit process. Who knows. It may not happen. Brexit was non-binding. But the uncertainty is sure to continue, not only into October but also into November, when the US elections have the potential to be, well, a ‘riot.’
Globalization and the bailout of the financial system both created winners and losers. The rich got richer and the poor, well, they got poorer. They are now flocking to saviors no matter how unsavory some of them might be. We live in interesting times.
Weekly Market Review
Stocks
Global stock markets lost $2 trillion on the day following Brexit and then dropped another $1 trillion the next day as well. As fears of Brexit subsided, the markets staged strong rallies and, while they closed down on the week, the final losses were small compared to what they were at the lows.
The TSX Composite gained on the week. So is that it? Is fear of Brexit over? Probably not. Volatility has increased, and uncertainty should continue to dominate the markets going into the summer. August and September are noteworthy as two of the weakest months of the year.
In the short term, the easing of Brexit fears could take markets to new highs. The US election conventions get underway in July, and they could be a ‘riot.’ Short-term trends have turned down, and intermediate trends are wavering. Long-term trends are still in a topping mode. Odds favor the downside over the upside.
Bonds
We are taking a look at bonds for the first time in a while. We are showing three charts: the 10-year German Bund; the US Treasury 10-year note; and the UK 10-year Gilt. All have been falling in yield, and the German 10-year Bund has gone negative. The UK 10-year Gilt fell despite the UK seeing its credit rating dropped to AA from AAA by S&P.
Currencies
Brexit caused currencies to roil. The US$ leaped, the British pound swooned and the euro sagged. The Canadian dollar also sagged, but the Japanese yen proved it was a safe-haven currency, just like the US$, and rose to new highs on the week. The US$ appears poised to rise further, while the euro seems destined to fall further.
Gold and Precious Metals
If there was a big winner on the week, it was gold and precious metals. Gold, silver, platinum and palladium all rose on the week. Silver had an especially strong up week. Gold and silver made new 52-week highs, a positive bullish sign. But the really big winners were, once again, gold stocks.
The Gold Bugs Index (HUI) and the TSX Gold Index (SPTTGD) were both up roughly 6%, and are now both up 100% on the year. The gold stocks also made new 52-week highs. One of the keys of the week was that gold was rising in all currencies, including the US$, even as the US$ was up on the week against other major currencies.
We have always contended that a real bull market cannot get underway for gold and precious metals until it is rising in all currencies. Gold remains a key reserve currency in the world’s central banks, alongside the US$, euros, British pounds, Japanese yen and, increasingly, the Chinese yuan.
Former Fed Chairman Alan Greenspan also spoke this past week. He warned that Brexit could trigger further crises, and said that the world needed to return to the gold standard as it existed prior to the creation of the Federal Reserve in 1913. We are sure that went over well in the world’s central banks and private banks.
Gold appears headed to test major resistance up to $1,400, and silver could rise to $20/$21. Technical patterns have been positive, and pullbacks have been shallow. The negatives are the increasingly negative commercial COT and sentiment that is getting into frothy territory.